The SA Reserve Bank warns that Trump's tariffs could shrink GDP by 0.69%, threatening economic stability.
Image: IOL/Ron Ai
The South African Reserve Bank (Sarb) has warned that, should its worst-case scenario play out, gross domestic product (GDP) could shrink by 0.69% instead of the gain of 1.7% it hopes for.
In its latest Monetary Policy Review, the central bank cautioned that the shocking tariffs implemented by United States President Donald Trump could slam the economy if they came into full effect and resulted in the loss of the preferential trade agreement, African Growth and Opportunity Act.
Adding these two issues together along with a 15% decline in the value of the local currency, and South Africa’s GDP would be slammed to a decline of as much as 0.69%. Its baseline expectation is for GDP to gain 1.7% this year. The economy grew 0.6% last year.
The rand hit a record high last Wednesday following what Trump called “Liberation Day” and imposed tariffs of 30% on South African exports to America. Having flirted with R20 on April 2 – Liberation Day – and surpassing levels last seen in June 2023, it retreated somewhat on Thursday, trading just below the mid-R19 rand.
The local currency has since come back to below the key R19 to the greenback range and could, Old Mutual chief economist Johann Els believes, could strengthen to between R16 and R17 to the dollar over the longer term and, at a push, the R15 to R16 range, which has a somewhat lower probability, but is not impossible.
Els has said that the local currency was back to where it was in January, and was almost back to January 2024 levels, when it was trading at levels of between R17 and R18 to the dollar.
The rand has also been adversely affected by tensions in the Government of National Unity, which some currency watchers had previously said accounted for about 60% of its recent serious wobbles.
Sarb’s scenario looked at the possibility of an average of 25% in tariffs. Following the global market shock, Trump backstepped on most tariffs, apart from China, and gave the world a 90-day reprieve during which they would be 10% for most countries. However, import duties affecting the local automotive sector have already come into effect.
“Trade tensions are expected to deepen geo-economic fragmentation, disrupt supply chains and restrict market access – dampening private investment, consumption, and growth. The impact of tariff hikes on global growth and inflation is potentially large, with estimates ranging widely depending on how they are implemented,” said the Sarb
Domestic economic activity has been subdued over the past two years, said Sarb’s review. “After a strong COVID-19 rebound to 5.0% in 2021, output growth slowed to 1.9% in 2022. Economic activity slowed further to 0.7% in 2023 and to 0.6% last year.”
This slowdown, it said, “largely reflects the marked decline in the performance of key state-owned network industries, with severe load shedding and logistical challenges hampering economic activity and reducing the potential growth rate of the economy. High production costs and a loss of competitiveness have also dragged down output growth”.
“Domestic growth can be boosted further by adopting policy measures that permanently lower inflation risk and strengthen competitiveness,” said Sarb.
