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Why a recession in the US is more likely and what the effects would be on SA

Natale Labia
By Natale Labia
11 Mar 2025
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Just when South Africa finally has a chance of getting back to a decent economic growth run rate, factors far beyond its control may again scupper its chances.

Is the US heading for a recession? While far from being the base case for most economists in 2025, this column has long argued that the chance of an economic slowdown in the world’s largest economy is a lot higher than many expect. These suspicions now seem to be coming true.

Over the past two weeks, several key financial indicators have started flashing yellow, others outright red.

First, the yield on the 10-year benchmark treasury bond has fallen around 65 basis points in recent weeks. This reflects general unease about growth. Second, the oil price has slipped below $70 a barrel to around $67, almost 20% off recent highs, always an omen of a tough economic climate to come. Third, the labour market is cooling quickly, with US jobs numbers out last Friday coming in below expectations; only 151,000 jobs were added, and unemployment increased to 4.1%.

Finally, and most dramatically, markets have taken note; there has been a rout in equities over the past two weeks. This culminated in a brutal sell-off on Monday, 10 March. Stocks were taken to the woodshed with the benchmark S&P 500 index down almost 3%, its worst day since 2022. The tech-heavy Nasdaq is officially in correction territory, with investors aggressively buying safe havens such as bonds.

Yet these are only the most recent indicators. As written in previous columns, over the past two years, the US economy has actually been a lot weaker than is often appreciated. When one scratched below the surface of the resilient headline data, there were actually only two factors keeping the US economy on track; first, Mag 7 capex on AI, which has run into the tens of billions of dollars; and second, the supposedly insatiable spending power of the US high-income consumer.

Triggers for a 2025 US recession


Recessions need triggers, and ironically it seems that the new Trump administration – which was meant to be market-friendly and pro-growth – could be just what is needed to push the whole teetering economy off the cliff.

Trigger one – the consumer is battling. While lower-income households have been struggling for some time, burdened by dwindling savings, maxed-out credit cards and mounting debt, the White House’s agenda will compound their woes by putting tariffs on imports.

The proposed duties on Mexico and Canada (now on pause), plus those already on China, will raise the US effective tariff rate to its highest since 1943, according to the Budget Lab at Yale. It estimates that higher price levels could cost households up to $2,000.

Furthermore, even the highest-earning households – the consumers who have kept the US economy on track – are now hurting. Much of the strength of the higher-income consumer over the past two years came from the “wealth effect”; wealthy Americans, after seeing their share portfolios and crypto wallets bulging after two years of record growth, have been more inclined to spend.

With markets now in freefall, this creates the risk of a dangerous downward self-reinforcing spiral; shocked at their investment portfolio losses,  consumers will be less inclined to spend, further worsening the economic downturn and, in turn, corporate profits and share prices.

Trigger two – the corporate sector has been spooked by Trump, having endured a barrage of policy pronouncements in an increasingly unpredictable business environment. The effects are already showing in business activity indicators.

The Goldman Sachs Analyst Index pointed to a contraction in sales, new orders, exports and employment across manufacturing and services companies in February. Manufacturing construction spending has also slowed, and BCA Research’s capex intentions indicator has fallen into contractionary territory.

Trigger three – the labour market. Even before Trump came in, many underestimated the extent to which America’s “strong” labour market was underpinned by public sector job creation. And then along came Doge; Evercore ISI estimates that Elon Musk’s public sector cost-cutting efforts could shave off a total of half a million US jobs this year. In an extreme scenario, that could reach more than 1.4 million. A planned crackdown on undocumented immigrants, who account for at least 5% of the workforce, will add to the job losses.

Adding to this darkening reality is that inflation, which had shown signs of waning, is proving more stubborn than anticipated with January’s CPI rising more than expected. This whiff of stagflation – that troublesome combination of stagnant growth and rapidly rising prices – raises the spectre of another policy misstep by the Federal Reserve. The central bank faces a delicate balancing act as it’s caught between the requirements of its dual mandate to maximise employment and deliver price stability.

Effects on South Africa


It remains to be seen if the days of the US sneezing and everyone else supposedly catching a cold persist. But even if the US is not the only global economic superpower as it was pre-financial crisis, a US recession would limit the potential for the SA economy to materially get back on track after a torrid decade of State Capture, a pandemic and an energy crisis.

Softer commodity prices would hurt resource exports and tax revenue. A stronger dollar and weaker rand, as is usually the case during a US recession and “flight to safety” run could lead to higher borrowing costs if the SARB becomes worried about a resurgence in inflation from more expensive imports. Lower global growth estimates and weaker financial markets would worsen general business sentiment in SA, hurting the chances of a resurgence in critically needed investment.

Even outside of a US recession, the Trump administration seems determined to hurt the SA economy. It seems unlikely that the Agoa trade pact will be renewed this year, which would have a significant impact on SA exporters.

It is an unfortunate reality that just when South Africa finally has a chance of getting back to a decent economic growth run rate, factors far beyond its control – largely linked to the hyperactively destructive administration in the White House – may scupper its chances once again.

Should that happen, the disengagement of economic ties between South Africa and the US will only be hastened. All things considered, that may not be such a bad thing. DM

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