By Jacobus Lacock, Multi-Asset Portfolio Manager & Macro Strategist, and Sevashen Thaver, Multi-Asset Analyst 

Markets are increasingly concerned that the US could face stagflation in 2025, as slowing economic growth and potential price increases both reflect the impact of higher tariffs and ongoing monetary policy tightness.  

Recent data show a clear slowdown in activity, though inflation has not yet accelerated. Growth indicators are weakening: monthly non-farm payroll gains have moderated, and the personal saving rate has risen, suggesting households are spending more cautiously. Housing starts and sales have declined, and consumer-sentiment measures remain below average. In May, retail sales fell by nearly 1% month-on-month, auto sales led the decline at -4%, and food-service spending also eased. Overall, hard data (which were stronger earlier in the year) are now aligning with softer, leading indicators. 

Inflation readings have not yet reflected tariff pressures. In May, headline CPI rose by 2.4% year-on-year, and core CPI came in at 2.8%, both above the Federal Reserve’s 2% target. However, on a three-month annualised basis, both measures dipped below 2%, suggesting price momentum is slowing. This may be temporary, as companies may start passing on higher input costs later in the year once inventories shrink. 

Geopolitical developments may further fuel stagflation risks. Recent escalations between Israel and Iran mark a significant intensification compared to last year’s encounters and have already resulted in a tragic loss of life and humanitarian strain. Israel has stated it will continue strikes until Iran’s nuclear capability is addressed. Options include dismantling nuclear facilities, changing Iran’s leadership, or negotiating a new agreement – all of which carry risks, particularly to oil supply and prices. Although about 7 million barrels per day of spare global capacity exists, it may take time to bring it online. 

Against this backdrop, the Federal Open Market Committee kept its policy rate at 4.5%. In June, it revised its 2025 growth forecast from 1.7% to 1.4% and raised its core PCE inflation projection from 2.8% to 3.1%. The dot plot signals two rate cuts next year, contingent on evolving growth, inflation and international developments. 

South Africa: Weak growth, Strong markets 

Locally, South Africa’s growth outlook has weakened, with consensus forecasts for 2025 revised down from 1.7% in the first quarter to 1.1%, compared with 0.5% last year. Despite this, domestic asset markets have performed positively this year. The FTSE/JSE All Share Index is up over 10%, bond yields have eased, and the rand has strengthened by around 4%. Mining stocks led gains, with gold and platinum miners gaining more than 60%, and Naspers rising more than 25%, even as broader economic growth remains subdued. 

Inflation in South Africa is well contained. In May, headline CPI was 2.8% year-on-year (below the lower bound of the target range) and core inflation was 3%. A rise in food prices was offset by lower fuel costs and moderate services inflation. At this level of inflation, there is room for the South African Reserve Bank (SARB) to revise its target range to 3%. We expect National Treasury to formalise a change later this year and the SARB to cut rates at its 31 July meeting, unless rising oil prices prompt a delay. 

April retail sales data grew by 0.9% month-on-month and 5% year-on-year, led by general dealers. South Africa has also completed all 22 action items under the Financial Action Task Force’s greylisting action plan, which should help lower the country’s risk premium. 

Global markets remain sensitive to developments in the Middle East. The ongoing conflict, marked by escalating violence and tragic loss of life, is expected to persist, with the potential for US involvement and further volatility in oil prices. While caution remains appropriate, select opportunities may arise both internationally and within South Africa’s equity market. 

Disclaimer:  

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