Weak US labour report reflects damaging effect of tariffs

Our weekly podcast by Kevin Lings

Can SA achieve 3% inflation; and tariffs start to hit US labour market

The SA Reserve Bank has cut the repo rate by 25 bps to 7% and said it would focus on achieving 3% inflation. In this podcast, STANLIB’s Chief Economist, Kevin Lings, analyses the benefits and timing of the new goal. He also unravels the emerging slowdown in US job creation, which has raised concerns and changed the outlook for US interest rates.

The focus areas during the week included

The S&P 500 index declined by a substantial 2.4%, hurt by renewed US tariff increases, ongoing trade policy uncertainty and weaker economic growth, especially in the labour market and manufacturing sector. Trade deals and tariffs were a major driver of investor sentiment throughout the week. Interestingly, several companies have warned that tariff headwinds are weighing on their businesses, including Ford. Year-to-date the S&P 500 is up 6.1%.

Global equity markets also came under pressure as investors reacted negatively to President Trump’s newly-announced tariff rates. For example, the STOXX Europe 600 equity index declined by 2.6%. Although the updated tariffs are expected to generate additional tax revenue for the US Federal Government, they appear to have also reignited concerns about potential economic headwinds. Adding significantly to this cautious sentiment was a weaker-than-expected US employment report on Friday. While the weaker employment data is likely to prompt the Federal Reserve to cut rates in September, the read-though to economic activity is troubling. In this environment, SA’s All-Share Index declined by 1.2%, but it is still up a healthy 16.2% year-to-date.

The rand ended the month down 1.7% against the US dollar, at R18.07/$, which is similar to the performance of the emerging market currency index against the dollar in the same period. The decline in the value of emerging market currencies (including the rand) in July is largely because the dollar strengthened by 2.7% against the euro. In the year to date, emerging market currencies have gained 6.6% against the dollar, while the fand is up a more modest 3.9%.

On Thursday, President Trump signed an executive order to raise tariffs on most US trading partners:

All countries will be subject to a minimum 10% tariff, while 92 countries (listed in an annex to the executive order) will be subject to higher tariff rates. Among the hardest hit are Switzerland (39%, up from an initial 31%), Canada (35%), South Africa (30%), and Taiwan (20%). Generally (but with exceptions), a 10% tariff applies to countries with which the US maintains a trade surplus, a 15% rate is applied to countries that have reached a trade deal, and higher tariffs are applied to countries that have not struck a deal and with which the US runs significant trade deficits. A 40% tariff will be imposed on imports trans-shipped through third countries to circumvent tariffs. The new tariffs will take effect on 7 August, allowing a brief window for further negotiations. Several countries have indicated interest in seeking reduced rates through ongoing bilateral talks. The highest tariff is on goods from Syria, which will be taxed at 41%. Importantly, on 30 July, the US clarified that the commodity tariffs on copper would exclude copper ores, concentrates and cathodes. This has helped to reduce the overall effective tariff in the US.

Tariffs on two countries, the UK and Brazil, are listed at 10%, but a previous order signed by Trump added a further 40% tariff on some Brazilian goods. This is intended to punish the country for prosecuting its former president, Jair Bolsonaro, for trying to overturn an election he lost and inspiring his supporters to storm the seat of government. Trump’s order excluded many of the most common imports from Brazil from the additional tariff, including wood pulp, metals and airplanes, but left the duty in place for coffee. Among major US trading partners, imports from Taiwan will now be subject to a tariff of 20% instead of 32%; imports from Japan will be subject to a 15% tariff, instead of 24%; and imports from South Korea will be subject to a 15% tariff, instead of 25%. The revised rates also include a drop in tariffs on goods from: Vietnam, which were set at 46% in April, to 20% now; Indonesia, which was 32% and is now 19%; Bangladesh, which was 37% and is now 20%; Cambodia, which was 49% and is now 19%; Laos, which was 48% and is now 40%; Sri Lanka, which was 44% and is now 20%; Thailand, which was 36% and is now 19%; and Lesotho, which was 50% and is now 15%. Oddly, the rate for the Philippines has increased from 17% to 19%, even though its president, Bongbong Marcos, recently completed a friendly visit to the White House. The rate on goods from Serbia dropped only slightly, from 37% in April to 35% now, despite its president’s strong support for Trump. Another ally of Trump, India’s prime minister Narendra Modi, saw the tariff rate on goods from his country drop slightly from 26% to 25%. Israel was given a similarly small reduction from 17% in April to 15% now. The threatened 30% tariff rate on Mexico was delayed for 90 days, keeping the current 25% rate in place.

The European Union and the US reached a framework deal on trade, with tariffs set at 15%, although many key details remain unresolved. The US will keep a 50% tariff on steel and aluminum for the time being. The deal includes a commitment by Europe to purchase $750 billion of US energy and invest an additional $600 billion in the US. The lowered tariff rate will apply to vehicles, while pharmaceutical and semiconductor tariff decisions remain pending.

While the country-specific tariffs help to reduce uncertainty around the tariff regime, new sector-specific tariffs – particularly in semiconductors, pharmaceuticals, and other key industries – are still anticipated in the coming weeks. There is still no deal with China, while the 90-day extension with Mexico is important when estimating the US effective tariff rate. The US effective tariff is now estimated at around 18.5%, the highest since 1934. This is calculated before estimating any substitution effects.=

The US Federal Open Market Committee (FOMC) kept the Federal Funds target interest rate unchanged at a range of 4.25% to 4.5%. This was in line with market expectations. Michelle Bowman and Christopher Waller voted against the decision to leave rates unchanged, preferring to lower the target interest rate range for the Federal Funds rate by 25 bps. At the FOMC press conference, Federal Reserve (Fed) chair Jerome Powell highlighted the current high level of economic uncertainty and provided no further insight into the timing of a possible rate cut. At the time of the FOMC meeting it was clear that Powell believed that the FOMC was well positioned to “wait for greater clarity” on the economic outlook before adjusting interest rates. While Powell acknowledged the downside risks to employment, he flagged that “inflation is further from their goal than employment”. Importantly, the weaker-than-expected US employment data released on Friday has substantially changed the outlook for US interest rates, with the FedWatch Tool now reflecting an 80.3% change of a September rate cut, up from less than 50% just prior to the FOMC meeting.

‍US employment rose by a modest 73 000 jobs in July 2025, below market expectations for an increase of 104 000, while the previous two months of employment data was revised down by a massive 258 000 jobs. This means, for example, that the data last month (June) that was initially reported as a gain of 147 000 jobs is revised down to a gain of only 14 000 jobs, with the private sector adding only 3 000 jobs. Over the past six months, the US has added an average of only 81 000 jobs a month. This signals a very noticeable softening of labour market conditions, hurt by the negative impact of high import tariffs and the greater use of AI in the business sector. Long-term unemployment (longer than six months unemployed) rose very substantially in July and is now at its highest level since the Covid-induced weakness in 2021. Health care remains the primary driver of job creation, while the manufacturing sector shed jobs for the third consecutive month in July.

Despite the slowdown in job creation, the US unemployment rate remained historically low, ticking up slightly to 4.2% in July from 4.1% in June. The US unemployment rate has remained in an extremely narrow range of 4% to 4.2% in each of the past 14 months. It is important to highlight that the unemployment rate was boosted by a reduction in the size of the labour force, including a significant reduction in the number of immigrants. In July 2025, the US labour force declined by 38 000 people after a decline of 130 000 in June. The decline in the size of the labour force is creating a policy dilemma for the Fed. An ongoing curtailment of labour supply risks pushing wages and inflation higher if economic growth is stimulated – hence the Fed needs to be cautious in how aggressively it cuts rates. Given that US interest rates are currently restrictive, there is some scope to cut them further without necessarily fuelling further upward pressure on inflation. The latest large increase in import tariffs announced by the Trump administration will add to the Fed’s concerns about the persistence of high inflation. We continue to believe that tariff increases are largely a temporary price shock (especially if the economy is not adding many new jobs each month) that will fade in the second half of 2026, which also supports our expectation of a modest further cut in US interest rates. Consequently, we still expect the Fed to cut rates by 25 bps at the next FOMC meeting on 17 September.

In Q2 2025 the US economy grew by a robust 3% q/q (annualised). This was above market expectations for growth of 2.6% q/q. In Q1 2025 US GDP declined by 0.5% q/q (annualised). Although the latest growth rate surprised on the upside, the underlying trend growth rate is relatively weak and below the medium-term average rate of growth of over 2.5%. A breakdown of Q2 2025 GDP performance by sector reveals that growth was mostly driven by a 30.3% q/q decline in imports, which largely reverses the 37.9% q/q increase in Q1 2025 due to companies building up inventories ahead of tariff increases. The decline in imports also means that inventories fell in the quarter, deducting a meaningful 3.17 percentage points from Q2 economic performance. It is also important to highlight that consumer spending grew by only 1.4% q/q in Q2 2025, after growth of a mere 0.5% q/q in Q1 2025. Although consumer spending remains positive, the rate of expansion is underwhelming and well below recent trends, suggesting that consumers are adopting a more cautious approach to spending given the uncertainty around import tariffs.

Data released by the US Bureau of Economic Analysis (BEA) on Thursday indicated that PCE inflation picked up in June. The core personal consumption expenditure (PCE) index rose 0.3% m/m in June, up from May’s reading of 0.2%. On a year-on-year basis, prices rose 2.8%, remaining persistently above the Fed’s long-term inflation target of 2%.

The South African Reserve Bank (SARB) decided to cut the repo rate (repurchase rate) by 25 bps to 7% at its Monetary Policy Committee (MPC) meeting on Thursday. The decision was unanimous and in line with market expectations. In deciding to cut rates, the MPC highlighted that SA’s underlying growth trend remained weak, mainly due to persistent supply-side problems. It said higher levels of uncertainty also seemed to have affected output, with business and consumer confidence deteriorating in the first half of the year. This, together with an assumption of higher US tariffs on SA, prompted the SARB to mark down its 2025 GDP growth forecast to 0.9%. On inflation, the SARB flagged that the rand had strengthened since the previous MPC meeting and inflation expectations had moderated. However, food inflation has risen, mainly due to meat prices, while fuel prices are falling more slowly than in the recent past. The MPC expects headline inflation will rise over the next few months, averaging 3.3% for 2024.‍

The SARB announced that the MPC had decided to target a 3% inflation outcome rather than the midpoint of the 3% to 6% target range. This does not mean that the inflation target has officially changed, but that the Quarterly Projection Model will be recalibrated to achieve a 3% outcome, which implies a significantly different path for official interest rates. Over the past year (at least) the SARB has undertaken extensive research into the costs and benefits of moving to an explicit 3% inflation target. It is convinced that the benefits significantly outweigh the costs and it aims to achieve the 3% outcome by Q1 2027. It can also be inferred from the announcement that the SARB is uncomfortable with the length of time it is taking the government to formally announce a revision to the inflation target and it feels that this is an opportune time to focus on achieving a 3% inflation rate. This “urgency” to focus on a 3% inflation target is partly informed by the fact that SA’s headline inflation rate has remained in a very narrow range between 2.7% and 3.2% in each of the past nine months. The SARB’s change in monetary policy will be applauded in financial markets and could result in very significant economic benefits, including a welcome reduction in SA’s cost of capital and a less volatile and better-performing exchange rate. However, these benefits assume that the country can achieve a 3% inflation outcome on a sustained basis.

In June 2025, SA’s producer price index (PPI) rose by 0.2% m/m, driven by higher food prices. The increase was in line with market expectations (Bloomberg). The monthly increase in the PPI pushed the annual rate of producer inflation up from 0.1% y/y to 0.6% y/y, aggravated by base effects. In 2024, producer inflation averaged only 3%, lower than the 6.9% rate recorded in 2023 and 14.3% in 2022. While headline producer inflation is expected to remain within the SARB’s target range for the rest of the year, food and petrol prices are likely to increase steadily, posing upside risk to the overall PPI outlook.‍

SA’s National Treasury released the June 2025 statement of revenue, expenditure and borrowing. This month’s release is particularly important, as most mining companies pay their taxes in June and December. According to the data, South African gross tax revenues were R454.1 billion for the first three months of the fiscal year (April to June 2025), which represents a respectable annual increase of 8.6%. In contrast, government’s main budget expenditure rose by only 1% y/y in June, down from a 5.5% y/y increase in May and only 0.2% y/y growth in April. The strong tax collection in the first quarter of 2025 is a promising start to government finances for the 2025/26 financial year, particularly the strong VAT collection and solid corporate income tax collection. It remains vital for government to more aggressively implement economic reforms to help boost economic activity and broaden the tax base.‍

China’s official manufacturing Purchasing Managers’ Index (PMI) contracted for the fourth consecutive month in June, sinking deeper into contractionary territory. The faster rate of decline underscores the weakness in China’s industrial base, aggravated by heightened uncertainty, especially around trade tariffs. Manufacturing PMI deteriorated to 49.3 index points in July from 49.7 in June. The reading was below market expectations (Bloomberg) for manufacturing PMI to remain unchanged at 49.7 points. In addition, the expansion in the non-manufacturing PMI slowed to 50.1 index points, with activity affected by disruptive weather conditions. This was down from 50.7 in June, and below market expectations for the index to moderate to 50.2.

Consumer inflation in the Eurozone held steady at 2% in July, although this was slightly higher than market expectations for inflation to ease to 1.9%. Core inflation, which excludes energy, food and tobacco prices, held steady at 2.3%.‍

Eurozone GDP grew by a modest 0.1% quarter-on-quarter in the second quarter of 2025. This is down from growth of 0.6% q/q in Q1 2025 – which was boosted by a surge in exports as US companies anticipated an increase in tariffs. The Q1 growth outcome was above market expectations for zero growth. Over the past year, Eurozone economic output grew 1.4%, also slightly above market expectations for growth of 1.3%.

The Bank of Japan (BoJ) left its key interest rate unchanged at 0.5% at its 30/31 July monetary policy meeting. This was in line with market expectations. In its quarterly outlook, the central bank revised its expectations for inflation, forecasting that the core inflation rate will increase to 2.7% in fiscal 2025 from the 2.2% forecast in April, reflecting persistent increases in food prices. In addition, the Bank expects the economy to grow by 0.6% in fiscal 2025, up slightly from its previous forecast of 0.5%. BoJ Governor Kazuo Ueda said that the likelihood of the bank’s outlook being realised has increased, leading some investors to anticipate that the central bank could raise interest rates later this year. The bank continued to assert that if economic activity and prices developed in line with its forecasts, it would continue to raise the policy interest rate and adjust the degree of monetary accommodation.