Salaries to remain under pressure in South Africa, economists warn

Employees in both the public and private sector in South Africa could see a slight wage increase in 2022, but employers are likely to keep tight controls in place to rein in operating costs, say economists at Nedbank.

The financial services company said in a research note that public sector wages were frozen in 2020 before climbing 1.5% in 2021 – well below inflation, estimated at around 4.5%.

“The wage bill exploded over the past decade, contributing to the country’s weak fiscal position and increasingly crowding out other social and economic spending priorities.

“Any strategy to return the country’s finances to a sustainable footing will require continued and considerable wage restraint. Public sector pay is therefore unlikely to provide much of a boost to household disposable income in 2022,” the group said.

Nedbank added that real wages have been under prolonged pressure in the private sector, shrinking by an average of 0.7% per annum between 2015 and 2019 before reducing even further by 5.4% in 2020.

“In recent negotiations, organised labour upped wage demands, asking for well above-inflation increases. While private-sector pay should improve as economic activity normalises, businesses still lack confidence in the country’s growth prospects, suggesting that companies will continue to exercise tight controls over staff and other operating costs,” it said.

The bank said that rising inflation also poses downside risks, particularly on essentials like food, fuel, and energy.

“These are forecast to remain elevated in the first half of 2022, eroding households’ purchasing power. The SARB is expected to normalise monetary policy to ensure that inflation remains anchored around the 4.5% midpoint of the bank’s inflation-targeting range.

“Higher interest rates, in turn, will increase the cost of new borrowing and the servicing of existing debt, dampening credit demand and trimming the funds available for discretionary spending.”

Inflation

Inflation is expected to rise to 4.5 % in 2021 due to pressures from food and energy prices, the National Treasury said on Thursday (11 November).

Tabling the Medium-Term Budget Policy Statement (MTBPS) in the National Assembly finance minister Enoch Godongwana said, however, that inflation is expected to remain contained over a three-year period.

“Inflation is projected to reach 4.5 % in 2021, reflecting upward pressure from non-core inflation – specifically food and energy prices – while core inflation remains subdued.

“Beyond 2021, inflation is expected to remain well contained within the target range, approaching 4.5 % in the outer years. Risks to the inflation outlook are primarily in the near term and assessed to the upside, mainly stemming from non-core inflation.”

Savings 

Nedbank said that despite the murky outlook for household incomes and the anticipated rise in inflation and interest rates, households would face these challenges with healthier balance sheets.

“Households managed to strengthen their balance sheets in 2020 and much of 2021. Borrowing increased by less than disposable income, containing debt burdens to a manageable 66.7% of disposable income in Q2.

“Households also became net savers. Savings totalled 0.9% of disposable income in 2020, before easing to 0.7% and 0.3% in Q1 and Q2, respectively. At the same time, asset prices staged a strong comeback. House prices strengthened modestly. Equity prices bounced back, lifted by the rising tide of surging commodity prices and rallying global bourses.”

As a result, net wealth increased from 345.7% of disposable income in 2019 to 354.1% in 2020 and 377.4% in Q2. Nedbank said this should offer some buffer against the changing financial landscape, helping to sustain borrowing and spending in 2022.

Slight increase expected

South African private-sector workers are set to receive an average pay rise of 5.5% in 2022, which is a cautious improvement over the 4.7% average increase paid this year, according to salary research from global advisory Willis Towers Watson.

The group’s data, published recently, shows that the proportion of businesses expecting to freeze pay altogether is also set to fall from 12% this year to 5% in 2022.

“Businesses are navigating a tentative recovery from the pandemic, and it is encouraging that many are planning to offer more generous pay rises,” said Melanie Trollip, director of talent and reward at Willis Towers Watson South Africa.

“The thaw in pay freezes will be welcome, and many people can expect next year’s pay rise to be an improvement on this year.”

Monthly take-home pay in South Africa saw a significant increase of 13% in September, mainly due to government wage increases and backdate payments. However, this increase is likely to be short-lived, the latest BankservAfrica Take-home Pay Index (BTPI) shows.

As a consequence of these contributing factors, the nominal average BankservAfrica take-home pay reached R15,794 in September 2021. In real terms, the average salary was R13,047, which was 8.3% higher on a year-on-year basis.

“All these factors indicate that the average take-home pay will not increase at September’s rate in the next month or so,” BankservAfrica said.

“The worldwide supply chain issues and the shock from July’s unrest are likely to constrain economic growth and affect salary increases. We expect a downward adjustment in salaries in the coming months.

Labour market

South Africa’s labour market remains under pressure, lagging far behind the recovery in aggregate economic activity, Nedbank warned.

The bank noted that the economy shed more jobs in Q2 2021, with employment shrinking 0.4% q-o-q, still 1.5 million jobs below its pre-pandemic level.

“Since the pandemic struck, the public sector hired more workers, but the public sector’s finances are too weak to create more jobs or even sustain employment at these levels. Private sector employment remains depressed. Since level 5 lockdown in April last year, companies have been preoccupied with restoring profitability by cutting costs and improving efficiencies.”

Many firms are now in a better financial position, which should eventually translate into some job creation, the bank said. However, it noted that the recovery has been uneven among sectors.

“Covid restrictions tend to hurt the labour-intensive industries with a high degree of direct human contact the most. Consequently, travel restrictions and adjusted levels 3 and 4 with bans on alcohol sales and sit-in dining have repeatedly disrupted rebounds in travel, hotels, accommodation, restaurants, food services, entertainment and other tourism-related industries.

“As a result, these industries have been operating at a fraction of total capacity for almost 18 months. This has forced most to downscale operations, while many have folded altogether, adding to the dismal unemployment outcomes.”

Nedbank said that these jobs will only return once the bulk of the population has been vaccinated, enabling the government to relax health restrictions with a far greater degree of permanency.

“On this front, there have been some encouraging developments. The US and most European countries now allow travel to South Africa without forced quarantine. The UK also recently removed South Africa from its red list for international travel.”

However, South Africa still lag far behind most of its major trading partners in vaccinations, it said.

“The progress made among the most vulnerable population could help reduce both the human and economic costs of future Covid outbreaks, giving high-contact industries the space and certainty to rebuild.”

If the country speeds up vaccinations, perhaps reaching the bulk of the population by mid-2022, then a rebound off a low base is possible for high-contact services, which would accelerate the economic recovery and support renewed job creation, it said.

“If not, the country will remain subject to the sort of lockdowns experienced throughout 2022, which would probably force more firms within these industries over the cliff, dampening economic growth and aggravating unemployment.”

Read: The wage increases workers in South Africa can expect in 2022