As we commented early in 2024, global dissatisfaction regarding inflation and harsh economic realities has coincided with the phenomenon of a spike in the election cycle – roughly 50% of the global population experienced an election year in 2024, representing the highest percentage in a single year in our modern history. High inflation has been a great dethroner of reigning political administrations throughout history as disillusioned constituents express their frustration with economic hardships and rally against the status quo, its incumbents and its political elites. This was especially true in 2024, when the great election year earned the nickname “the bonfire of the incumbents”. This was as true for South Africa, where the ANC lost its national majority, as it was in places like Senegal and Botswana, who experienced a change of party.
Further afield, we saw the bonfire of incumbent politicians extend to the United States, where President Trump and the Republican Party unseated the Democrats; in Britain, where the centre-left Labour Party returned to power after over a decade; and in India, where Narendra Modi’s Hindu nationalist party lost its majority. Perhaps it is the assertion of Javier Milei, who served his first full year as Argentina’s president in 2024, that “the public sector is the illness” that has resonated with voters worldwide. For some countries, like Germany and France, the great election year is far from over. Germans will again head to the polls in 2025 after Chancellor Olaf Scholz’ minority government dissolved following a no-confidence vote because of Scholz’ decision to fire his finance minister over his ideas regarding the revitalisation of Germany’s stagnant economy. In France, Prime Minister Michel Barnier's fragile coalition government has suffered a similar no-confidence vote just three months after he was appointed by President Macron.
Against such a political backdrop, we have seen the euro lose as much as 7.5% of its value against the US dollar from its peak in 2024, or as much as 16.0% of its value since its 2021 peak. In the same vein, the S&P 500 has been on a tear – returning as much as ~30% for the year to mid-December until the Federal Reserve rained on its parade by acknowledging that their 2024 year-end inflation projection has “kind of fallen apart”. Much of the hubris being priced into the US stock market has been heightened by the election of President Trump whose US pro-growth policies have the capacity to reshape the playing field for large sectors of the economy. Trump’s pick for the US Treasury secretary, Scott Bessent, shares similar ideas with him regarding reshaping the role of US manufacturing with the imposition of trade tariffs across various markets, and in particular upon China. Although tariffs have become slightly more commonplace as a tool for protectionism within the US and the EU since Trump’s 2016 presidency, they are a tiny fraction of what was leveraged by the US in the 1800s and early 1900s as an avenue for raising revenue.
Bessent argues that Trump is the biggest free trader of all because he recognises that to achieve true free trade, the US needs a more activist approach to trade internationally. Many of Bessent’s views on the matter of tariffs strongly echo those of former US President Ronald Reagan:
“Free trade is, by definition, fair trade. Where domestic markets are closed to the export of others, it is no longer free trade. When governments subsidise their manufacturers and farmers so that they can dump goods in other markets, it is no longer free trade. When governments permit counterfeiting or copying of American products, it is stealing our future, and it is no longer free trade… I will not stand by and watch American workers lose their jobs because other nations do not play by the rules.” – Ronald Reagan, 1985, remarks at a White House meeting with business and trade leaders.
In Bessent’s mind, equilibrium of trade could only be reached between the US and China if China was following a truly open economic system as opposed to one driven by central planning, government subsidies, mercantilism, economic stimulus, and autocracy. Bessent is of the view that the US working class has suffered due to lower-priced Chinese labour, which has pushed down US domestic wages over time. This has led to a heightened US wealth gap as the US working class earns less and the large trade surpluses generated by China have been invested into US stocks and bonds, which has made wealthy Americans even wealthier. As such, Bessent is pro tariffs, a stance which incidentally should also raise tax revenues for the US government at a time when it is Trump’s desire to reduce personal taxes and keep the corporate tax rate unchanged.
Bessent also agrees with President Trump’s plans to rein in government spending, arguing that the Biden administration forked out too much cash for industry subsidies, many of them green-based, which will ultimately fail due to the inability of any government to pick winners and losers within private sector industries. Such intervention for privileged US industries can create dependency into perpetuity which is absorbed by American taxpayers.
The issue of the US fiscal overspending, which currently stands at US$1.8tn in excess of revenue, or 7.0% of GDP, has become a blind spot to US incumbent politicians because to attempt to rein it in could spell short-term political suicide. In order to fulfil on this fresh mandate to address the deficit, Elon Musk and Vivek Ramaswamy, the co-leads of Trump's Department of Government Efficiency (DOGE) will focus efforts on trimming federal spending instead of just kicking this can further down the road. Whether they could feasibly achieve their stated US$2tn target for spending cuts – equivalent to a third of all federal government expenditure – seems doubtful, although they have put forward several ideas already. These range from productivity and efficiency gains via both simplifying the complex US tax-filing system and prohibiting government employees from working from home, to reducing foreign aid programmes. They have also spoken to bolstering state IT systems to prevent hacking, which absorbed US$200bn in fraudulent payments during the pandemic, as well as cutting defence and education programmes that fail to deliver tangible outcomes for the American taxpayer.
The success of US tariffs and the size of the US fiscal deficit has large spillover impacts for South Africa, both as a result of our African Growth and Opportunity Act (AGOA) trade status and because a larger offshore deficit absorbs capital that could otherwise flow into the periphery of the financial markets to fund deficits like our government’s own.
How these policies will unfold is still uncertain, but I am reminded of something my colleague Sandy McGregor wrote in 2022: “The problem is that we still do not know what the post-pandemic world is going to look like, and we are on a journey without a clear vision as to our destination.” Perhaps the same can be said of a post-Trump world.