Bad news for salaries and wages in South Africa

 ·6 Jul 2023

New data from the Bureau for Economic Research (BER) shows that businesses, analysts and unions expect inflation to increase in the second quarter of 2023 – and salaries and wages hikes to be smaller.

Inflation expectations of analysts, business people and trade unions rose by 0.2 percentage points to average 6.5% in 2023.

The group’s new inflation expectation survey for the second quarter of 2023 is used by the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) as one of the various indicators of interest rate decisions.

An overall view of inflation increasing points to a greater possibility of more interest rate hikes.

“Between the first and second quarter surveys, the annual rate of increase for headline consumer inflation trended down from 7% in February 2023 to 6.3% in May,” said the BER.

“Among the three social groups, analysts foresee the lowest inflation rate over all three years, while business people expect the highest rate. Trade unions are not far behind firms.”

Households’ one-year-ahead inflation expectations climbed drastically from 7% in the first quarter to 8.1% in the second – the highest since 2010. Medium-term inflation is also expected by households to increase to 10.7% from 9.9% over the next five years.

Respondents to the survey also lowered their forecast of salary and wage growth in 2023 and 2024.

“Whereas they previously expected wages to rise by 5.3% this year, this was trimmed to 5%. Wage growth of 5% is also pencilled in for 2024,” reported the BER.

On top of this, GDP growth expectations were downscaled by all three social groups to 0.6% in 2023.

“This is notably lower than the 1% anticipated during the first quarter of 2023. For 2024, the average growth expectation is 1.4%, largely unchanged from 1.5% before,” said the BER.

Possible interest rate hikes

The MPC will be worried if there is a rise in inflation expectations. This would occur if inflation expectations significantly exceed the desired midpoint range of 3% to 6% or if other indicators of inflation worsen, said the group.

When inflation expectations increase, it can potentially result in workers demanding higher wages to compensate for the anticipated higher inflation in the future.

The BER said if demand remains strong, businesses have the option to raise their prices. However, to avoid the possibility of higher inflation expectations becoming a reality, the South African Reserve Bank (SARB) may need to raise the interest rate.

Talk of further interest rate hikes has emerged from analysts as the SARB is expected to keep with its tradition of trying to bring inflation back into the target range.

Despite the central bank’s attempts to control inflation by raising interest rates, the current inflation level persists.

The SARB stated that the recent 50 basis point hike in May 2023 signifies that monetary policy has only now entered restrictive territory.

Economists from across South Africa, including the BER, have pencilled in another 25 basis points for the next MPC meeting later this month.

In an interview with Bloomberg TV on 3 July, Letsetja Kganyago, the governor of the SARB, said: “What is in no doubt is that policy is going to have to remain tight for a little bit longer than actually, the market had been pricing.”

“And the reason has been that inflation has been more persistent than we had actually thought.”

He noted, however, that it was too soon to know if the bank would increase rates similar to how the US Federal Reserve did in June.

In follow-up interviews, the governor indicated that the overall inflation trend, especially over the logner-term, was positive.

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