The US starts flexing its muscles

20 January 2025 - Will the second Trump administration prove more effective than the first? Can the Gauteng provincial government fix the finances? Do South Africa’s youth have a viable future? How will Germany’s domestic growth woes impact South African exporters?

The US starts flexing its muscles

Today, 20 January 2025, Donald J Trump assumes office as the 47^th president of the United States. The “Trump Agenda” will start becoming apparent early, as Mr Trump issues a whole slew of executive orders on day one which will give some indication of his policy direction.

A common feature of many of Mr Trump’s announcements has been their assertiveness and unconventionality. Examples include the purchase of Greenland, restoring US control over the Panama Canal, a ban on TikTok, the introduction of import tariffs at scale, and mass deportations of illegal immigrants, focusing on those with criminal records. These announcements, whether they lead to actual action or not, reflect a vision of a “strong” USA, a descriptor which Mr Trump would no doubt endorse.

Globally, political leaders are having to recalibrate their expectations of what the US will do and what its stance will be. Under the pressure of that uncertainty, a deal finally appears to have been struck in the Middle East, which will see a ceasefire between Hamas and Israel, the release of Israeli hostages in exchange for Palestinian prisoners, and the gradual withdrawal of the Israeli military from Gaza. In addition to pressure from the incoming Trump administration, the weakening of Hamas through Israeli military action will have played a significant role in producing this outcome. Last week, Hamas official Bassem Naim told Saudi state news channel Al Arabiya that he “couldn't imagine that [the deal] could be possible without the pressure of the incoming administration led by President Trump”.

It remains to be seen whether Mr Trump will find a way to resolve the Russia-Ukraine war, which he promised to do before taking office. His Ukraine peace envoy, Keith Kellogg, has tempered expectations, saying that the war would be resolved in the first 100 days of Mr Trump’s taking office. Some reporting suggests Mr Trump and Vladimir Putin are arranging a meeting on the issue. 

While seeking to demonstrate strength externally, Mr Trump’s major challenge in his first year will be holding together the fractious Republican party, which – while previously united by opposition to former President Biden and Covid policy – has begun to fracture over questions such as foreign worker immigrant visas, the TikTok ban and other issues. 

For over a decade, the Republican party has often faced internal rebellion in Congress. With a tiny majority in the House, Mr Trump and his ally, Speaker Mike Johnson, will have their work cut out for them setting a legislative agenda. While Mr Trump has become the dominant force within Republican politics, he has not been able to bend the party to his will, with some of his strongest supporters in Congress defying him on budget issues or speaker elections.

Nevertheless, the new Trump administration seems far better prepared to take power than did the previous one. Mr Trump himself is now surrounded by a different ideological grouping than the formally mainstream Republicans who staffed much of his previous administration, and this will likely make the second Trump administration significantly more impactful than the first. The South African government should brace itself for some uncomfortable conversations and needs to lift its diplomatic game if it wants to keep up.

Gauteng’s finances are unwell

South Africa’s economic heartland, the province of Gauteng, could be facing bankruptcy as early as June 2025 if fiscal discipline is not enforced, according to Lebogang Maile, the provincial finance minister. The province depends on the National Treasury for well over 90% of its R169 billion budget. It is facing pressure on the revenue side because the Treasury is cutting its allocations to provinces in pursuit of fiscal discipline and debt consolidation – in the case of Gauteng, by an estimated R50 billion over the next five years.

More importantly, however, the province’s spending is not well controlled. The Gauteng health department, which consumes 39% of the provincial budget, is thought to be a main driver of the province’s financial woes. Entrenched corruption – by what Professor Mark Swilling of Stellenbosch University describes as a “syndicate” within the department – represents a continuation of state capture that the provincial government is visibly reluctant to tackle. The way in which the Gauteng health department threatens to sink the province’s finances is reminiscent of the threat which the National Health Insurance poses to the national finances.

The province’s financial troubles also pose a potential threat to the anti-Government of National Unity (GNU) premier of Gauteng, Panyaza Lesufi. At the 56^th national conference of the African National Congress (ANC) in December 2027, Messrs Lesufi and Maile will be presenting themselves as leading representatives of the anti-GNU faction within the ANC. But their case will be weakened if their contrarian approach to governance – which has successfully excluded the Democratic Alliance from the provincial government as well as the government of the three Gauteng metros – leads to a financial shambles associated with the sustained decline of the province’s infrastructure, government services and economic performance.

SA matric results: pass rate up, throughput down

At first glance the National Senior Certificate results released last week paint a rosy picture of the state of school education in the country. The national pass rate for 2024 set a record with an average of 87.3%, the highest since 1994, 4.4 percentage points higher than the 82.9% attained in 2023. However, the throughput rate, or the number of Grade 1s who completed school in the expected 12 years, was 63%, three points lower than the previous year.

One possible reading of the numbers is that the pass rate is artificially inflated by holding back or exiting the less promising students to ensure that only the candidates more likely to succeed are given the opportunity to write their matric exam. The Free State is a circumstantial case in point: for several years now, it has reported the highest provincial pass rate (91% in 2024) and the lowest or second-lowest throughput rate (55% in 2024).

A further concern is the small number of candidates successfully writing examinations in physical sciences, life sciences, and mathematics, the subjects typically required for university courses in science, technology, engineering and maths (the so-called STEM subjects). In 2024 candidates took 826,925 examinations in these subjects, a drop of 2.5% compared to the 847,439 examinations administered in 2023. Just 31,345 candidates achieved a mark of 60% or higher in physical science, while only 44,636 did so in mathematics.

Germany’s struggles continue

Germany was South Africa’s second most significant export market in 2024, placing after China, but ahead of the United States. However, in 2024 the German economy shrank for the second year in a row, declining by 0.2% after the 0.3% drop registered in 2023. Anaemic growth in Germany and Europe more broadly – in the manufacturing and construction sectors especially – means lower demand for South African raw materials and commodities, negatively impacting exporters in mining, manufacturing, and agriculture.

Germany is set to hold a snap election on 23 February. The Christian conservatives, led by Friedrich Merz, are leading in the polls, at a support level of around 30%. If they perform as expected, they will end the current “traffic light” coalition government composed of the social democrats, the liberals and the greens, and current Chancellor Olaf Scholz will be ousted.

The right-wing populist Alternative für Deutschland party is polling in second place at around 20% but will fail to find a role in government because it is shunned by all mainstream parties. This means that Germany is likely to get a government led by a centre-right party in a coalition with one or more parties of the political left. As a result, it is unlikely that much-needed reforms to liberalise the market and spark economic growth will materialise.  

Potential rising trade tensions around matters such as tariffs between Germany and the US will make the incoming administration’s growth task even more difficult. The Bundesbank, the central bank of Germany, forecasts GDP growth of just 0.2% in 2025. The years ahead will likely see a growing global divide between jurisdictions sharply focused on economic growth, such as Argentina and the US, and those that fail to prioritise it sufficiently, such as South Africa and Germany.