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Johannesburg – US President Trump’s protectionist policies may have negative consequences for trade, however South Africa could benefit from growing demand for commodities if the US increases infrastructure spend.
This is according to Tertia Jacobs, US economist at Investec. Jacobs was speaking at a briefing about the impact of the US economy on SA investors.
Jacobs highlighted that before Donald Trump’s election, the US economy had already been performing better. Currently the US economy is on a “sturdier footing”, she said. The economic optimism has also translated in improved consumer confidence. Small business confidence is at its highest level since 2004.
Bond yields have risen sharply and mortgage bond spreads have also widened, it is important to note because the housing market is a big driver of the US economy, said Jacobs.
However, regarding Trump’s protectionist policies, Jacobs said protectionism would result in higher inflation and more aggressive hikes by the Federal Reserve Bank (Fed), which would support the dollar, she explained.
The Fed is likely to focus on its inflation and employment mandate. The US economy battled with disinflation for eight years and it is unlikely the Fed would act to squash inflation if it “rears its head”.
There are a lot of uncertainties as to whether Congress would prevent the enforcement of these protectionist policies, as it would drive trade tensions, especially from China, explained Jacobs.
Regarding Trump’s fiscal reforms, Congress is likely to look for “revenue-neutral” tax changes, as the budget deficit is substantially high at 104% of GDP, said Jacobs.
Trump promised tax cuts which is projected by Investec to amount to 2% to 3% of GDP. Trump’s fiscal proposals could have consequences for the US debt trajectory, rising from 77% to 127% of GDP by 2026. It would be important to monitor this “policy uncertainty,” going forward, noted Jacobs.
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What is important for South Africa is to monitor commodity prices, explained Jacobs.
“Coal and iron had a strong run. We don’t see these rallies as sustainable,” she said. It is likely to pull back as China slows down its property market. “We don’t see many downside risks to China but we must monitor what will happen to coal and iron ore prices as they are two of the four biggest commodity exporters,” said Jacobs.
It is important to keep watch of brent crude prices which will impact the rand, said Jacobs. The rand, combined with fuel levy increases in April will drive inflation further.
SA growth
What will drive the economy is recovery in agricultural production, and ultimately the income effects and employment that will result, as well as commodity prices, said Jacobs.
South Africa is currently stuck in a “low growth gap” and the biggest downside is lower household consumption.
More activity in industries requires fixed investment by the private sector, said Jacobs. She added that the CEO initiative in cooperation with National Treasury was a positive. Better relations with trade unions following the signing of the national minimum wage agreement also help drive inclusive growth, she added.
