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SA’s April inflation remains subdued; US tax bill will push debt higher

SA’s inflation rate for April, at 2.8%, is fairly subdued, partly because prices of goods being imported from China are in deflation. A cut of 25 bps by the SARB later this week would be justified, given both low inflation and low growth forecasts, and would provide welcome stimulus for the economy in the second half.

The US tax bill proposed by President Trump would deliver fiscal stimulus to the economy, but it will also significantly add to government debt. The US bond market has reacted negatively to approval of the bill by the House of Representatives. The stimulus will occur at the same time as tariffs push prices higher, and could result in entrenched higher inflation.

The focus areas during the week included

• US equity markets ended the week lower, with the S&P 500 down 2.6%. After a relatively quiet start to the week, the markets declined sharply on Wednesday (-1.6%) along with weakness in US Treasuries, after a weaker-than-expected auction of 20-year Treasury bonds. This pushed longer-term bond yields higher and caused the 30-year yield to hit its highest level since 2023. Negative sentiment was amplified on Thursday after the House of Representatives passed President Donald Trump’s tax bill, which is very likely to increase federal debt considerably over the next few years and could result in persistently high inflation. US equities continued to slide on Friday after Trump announced plans to impose a 50% tariff on imports from the European Union, effective 1 June, stating that trade talks are “going nowhere”. For the year to date, the S&P 500 is back in negative territory at -1.3%, while the 10-year government bond yield ended the week up eight bps at 4.51%, having risen to 4.58% on Wednesday.

• Interestingly, US Treasury Secretary Scott Bessent did not highlight the upside risk to US import tariffs on the European Union during the G7 Finance Ministers and Central Bank Governors meeting in Banff, Canada. The meeting was held from 20 to 22 May 2025.

• The South African equity market gained another 1% in the week and is up a healthy 11.2% year-to-date. This is despite continued weak economic growth: National Treasury has revised its 2025 GDP growth forecast from 1.9% to a more realistic 1.4%.
• ‍In the year to date the rand has gained 5% against a weaker dollar (strengthening by 3.9% month-to-date), which is largely in line with the emerging market currency index. The rand was undoubtedly oversold in April, reaching almost R20/$, but the outperformance in May has pulled the currency back to around fair value. We continue to expect the rand will maintain its long-term weakening bias due to the lack of effective economic reforms.‍

• President Trump’s “one big, beautiful bill” was endorsed by the US House of Representatives towards the end of the week. The bill is over 1 000 pages and contains numerous adjustments to government taxes and expenditures. Effectively the bill aims to permanently extend provisions of the 2017 Tax Cuts and Jobs Act that would have expired at the end of this year. It also temporarily raises the deduction for state and local taxes – known as “SALT” – to $40 000 for households with incomes of up to $500 000 per year and introduces a wide range of additional tax breaks, including overtime pay and tips. To partially offset lower revenue driven by tax cuts, spending cuts will include reductions to renewable energy incentives, tightened eligibility for health and food aid programmes, and Medicaid work requirements, among others. Overall, the Congressional Budget Office forecasts that the bill will add roughly $2.4 trillion to the budget deficit over the next decade. This figure excludes interest on the additional debt, potentially pushing the impact closer to $3 trillion, which has increased concerns in bond markets. The bill will now advance to the Senate, where it appears likely to face additional revisions. Congress has set a July target for a final bill to be signed into law, and it could look very different from the current version.

• On Friday Trump issued a new trade policy statement calling for 50% import tariffs on the European Union starting 1 June 2025. In announcing the unexpected increase, the President referred to “unfair trade barriers and lack of progress in negotiations”. The timing, if implemented, would conflict with the 90-day pause in tariffs which is scheduled to expire on 9 July. In a separate post on Trump’s social media platform, Truth Social, the president also warned of a new 25% import tax on iPhones that are not made in the US. Apple has been planning to shift production of iPhones sold in the US to India from China. These announcements highlight that, while trade tensions appeared to have eased after the initial trade negotiations between the US and China, significant risks remain.

• In May 2025, the US S&P Purchasing Managers’ Services PMI improved from a 17-month low to 52.3. This is up from 50.8 in April. The Manufacturing PMI also improved, increasing from 50.2 in April to a three-month high of 52.3 in May. Both readings were better than consensus estimates but are not necessarily indicative of a sustained pick-up in US economic activity, since the forward-looking components of the PMI remained subdued. Instead, the index benefited from the largest increase in inventory holdings on record and also appears to reflect “reduced trade worries following the pause on additional tariffs and accompanying improved economic growth prospects”. However, the report also noted that prices rose at the fastest rate since August 2022, which was “overwhelmingly linked to tariffs,” while export orders fell and “supply chain delays intensified”. Chris Williamson, chief business economist at S&P Global Market Intelligence, also noted that “at least some of the upturn in May can be linked to companies and their customers seeking to front-run further possible tariff-related issues”.

• The US National Association of Realtors (NAR) reported that existing home sales unexpectedly fell to a seasonally-adjusted annual rate of four million in April, down 0.5% from March and the lowest April reading since 2009. In contrast, the median sales price rose to $414 000, making this the 22nd consecutive month of year-on-year price increases. According to NAR Chief Economist Lawrence Yun, “pent-up housing demand continues to grow, though not realised. Any meaningful decline in mortgage rates will help release this demand”. Unfortunately, the average 30-year mortgage rate climbed to its highest level since mid-February 2025.

• The US Census Bureau reported on Friday that new home sales jumped to a seasonally-adjusted annual rate of 743 000 in April, up from March’s reading of 670,000 and well ahead of consensus estimates for 690 000.

• In April 2025, SA’s headline CPI inflation increased by 0.3% month-on-month, which was slightly above market expectations for an increase of 0.2% m/m. This pushed the annual rate of inflation modestly higher from 2.7% to 2.8%. Over the past seven months SA’s headline inflation rate has remained in a narrow range of 2.7% to 3.2%, which should encourage the Reserve Bank to cut interest rates further – even though inflation is expected to trend higher in the second half of 2025. A breakdown of the CPI data for April reveals that food inflation surged by 1.3% m/m, pushing the annual rate up from 2.2% to 3.3%. There was also a large increase in the cost of “information and communication services” (including TV services), which rose by 2.4% m/m. In contrast, fuel prices continued in deflation during April at -13.4% y/y. They will decline further next month due to the 22c/l decrease in the petrol price.

• SA’s Minister of Finance, Enoch Godongwana, presented the third iteration of his fourth National Budget on Wednesday, 21 May 2025. While the bulk of the Budget has not changed since March 2025, the Minister significantly reduced SA’s GDP growth forecast for 2025 from 1.9% to only 1.4%. According to National Treasury, the revision is because of ongoing logistical constraints, heightened political uncertainty, higher borrowing costs, and global headwinds. The downward revision has affected key ratios, including debt-to GDP and the government’s tax revenue projections. To help replace a portion of the lost revenue resulting from the withdrawal of the proposed VAT increase, the Minister announced an inflation-linked increase in the general fuel levy for petrol and diesel for the first time in three years, effective 4 June 2025. This should add an additional R3.5 billion to total tax revenue. The Minister also allocated an additional R4 billion to SARS to support debt collection and revenue-raising exercises.

• Given the lower tax revenue projections in the 2025/26 National Budget, the Minister of Finance has had to make some adjustments to spending plans. The reduction is achieved mainly through adjustments to provisional allocations to education, health, defence, correctional services, and home affairs. Other notable reductions include allocations to early retirement costs. National Treasury now expects only 15 000 people will take up the early retirement offer, not the 30 000 they expected at the time of the March 2025 Budget Review. The Minister highlighted that the primary balance is expected to be in surplus during the current fiscal year, at 0.8% of GDP. Unfortunately, debt-servicing costs remain one of the fastest-growing areas of government spending, while government’s debt-to-GDP is expected to peak at 77.4% of GDP in 2025/25, as opposed to the peak of 76.2% projected in March 2025. This is mainly due to the lower nominal GDP forecast.

• In April 2025, China’s total nominal retail sales amounted to 3 717.40 billion yuan. This represents a yearly increase of 5.1% y/y, down from March’s growth of 5.9% y/y, hurt by the escalation in trade tensions and exorbitant tariffs imposed by the US. The growth rate was below market expectations for an increase of 5.8% y/y (Bloomberg). On a monthly basis, retail sales barely grew: they were up 0.2% m/m in April, a sign that the growth momentum in household consumption activity remains weak, despite a range of government stimulus measures.

• In April 2025, the annual rate of growth in China’s industrial production slowed to 6.1% y/y from 7.7% y/y in March 2025. This was, however, above market expectations for growth to slow to 5.7% y/y (Bloomberg). On a monthly basis, industrial production also showed weak momentum, increasing by only 0.2% m/m (seasonally adjusted). While China was able to avert a significant decline in manufacturing at the start of the US/China trade war, it seems clear that Beijing needs to introduce additional monetary and fiscal policy measures to bolster confidence and economic activity.

• In May 2025, the HCOB Eurozone Composite PMI fell to 49.5 from 50.4 in April. The fall-off in the index was unexpected, with the service sector experiencing a sharp deterioration in activity. In particular, business activity shrank in Germany, while French output declined for the ninth consecutive month. Unsurprisingly, the European Commission (EC) reduced its forecast for economic growth in 2025 to 0.9% from the 1.3% it projected in late 2024. The downward revision reflected rising tariffs and uncertainty about US trade policy. The commission’s latest estimates expect inflation to reach the European Central Bank’s 2% target by mid-2025, earlier than previously expected.

• The UK’s annual inflation rate rose to 3.5% in April 2025. This was up from 2.6% in March and represents the highest level since January 2024. It was above market expectations for inflation to increase to 3.3%. The larger-than-expected increase was partly due to a surge in services inflation to 5.4%, which included a 27.5% m/m increase in airfares as well as large increases in gas, electricity and water prices. The Bank of England cut interest rates on 8 May by 25 bps to 4.25%, but is likely to adopt a more cautious approach to monetary policy in the coming months.