By Maarten Ackerman
In the immediate economic market reaction with Trump's inauguration, I guess one can argue it's quite limited. The market already reacted since after the election in terms of what the impact might be from these potential economic policies.
So, as an example, if you think about just the market's view right now in terms of future rate cuts in the U.S., that is already taking into account what Trump is likely to implement, as well as if you look at the bond market and the moving higher of the long-term interest rates in the bond market, that is a reflection of the fiscal spend that's going to come through.
So, a lot of the potential economic policies being priced into the market. Obviously, whatever that policies are going to mean for the economy, you won't see any reaction right now. That will come in time.
In terms of the inauguration, we might see some reaction on the market, but it will take time for him and his administration to start implementing those policies. And again, after the implementation, that will also take time to actually impact the markets. So, I think what we've seen since the election was definitely a strong U.S. market, and that's likely to continue on the back of the hope that there will be deregulation and also potentially tax cuts and also a stronger dollar.
So, the dollar was stronger not only on the fact that yields move higher, which is obviously attractive for dollar investments, but also given just his whole approach about making America great again, which is pro-dollar. So, that is likely to continue next week. We might see some volatility.
There's any surprises in terms of the inauguration, but I think given that they had a strong win, we could probably remember global shifts and how it can impact SA. Yeah, I think, you know, again, it depends on if and when a lot of the things that he said can be implemented. You know, there's a lot of policy that is going to be debated and implemented over time, but the impact on South Africa, I think, let's just stick to the main ones.
There's the direct and indirect consequences of any policy. The one that's talked most about is tariffs, tariffs towards China. If that happens, there might be some retaliation from China.
There might be some depreciation of the currency, which implies that they could knock on the currency, but they remain as competitive. But yeah, heavy trade tariffs towards China is going to have a ripple effect towards other emerging markets and Chinese trading partners, which include us. So, that will create a headwind for South Africa in terms of a direct impact on us.
It can also be at the time that the Chinese then decide to take out the bazooka, which they didn't use last year, to stimulate that economy aggressively, which then again will be positive for South Africa, given that we are a major commodity exporter to China.
So, the indirect impact given policy towards China can have positive or negative implications for SA, but that really depends on China's ability and willingness to actually stimulate the economy, which can give us a bit of a benefit. Staying with that, you know, Trump is talking about tariffs on all countries.
So, that will be negative for SA as well, if he slaps tariffs onto SA. And then, obviously, for us, we are a global open economy. We trade a lot.
We export a lot. So, if we're in a situation where all our trading partners are slowing down, given these trade wars, we see a stronger dollar and the Rand is under pressure, that creates headwinds for South African growth as well. The direct impact on SA is obviously the review of the AGOA trade agreement.
To us, yeah, the US is not our biggest trading partner. You know, we trade more with Africa as a collective and with China, but they are important. And I think what we need to understand is that if you look at our manufacturing industry and you look at the underlying industry since 2010, there were basically only two industries that had positive growth, and that's food and beverages, because we need to eat.
So, that industry went well. And then our auto industry, volatile, but the second one that created growth since 2010. All other industries was really underwater and talks to the challenges that we face from, as we know, structural issues and so on.
So, my point from AGOA is that if we get headwinds in terms of free trade with the US, that sector, which is only one of two since 2010, that's shown positive growth will under threat. It's a very important sector in terms of contribution to GDP, and also in terms of creating jobs. So, currently, we are right under the top 10 countries that export auto parts and auto vehicles to the US.
So, it is very important for us, and that is happening under some of those agreements. So, that is being reviewed, and some of those benefits are being removed. In terms of fiscal and monetary policy in the US, impact on fixed investments in South Africa, I think that's a little bit disconnected.
In fact, the US fighting inflation, and inflation being quite sticky, the expectation is that they probably won't be able to cut interest rates much more, which again provides a sweetener for the dollar to remain strong, and that attract a lot of investments into US assets.
For us to get more fixed investment into South Africa, the important thing is to remove our structural issues, to be more competitive, to get our labor productivity right, and to be able to compete on a global landscape. So, that's local issues that we need to address.
Maarten Ackerman is the chief economist at Citadel.
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