Johannesburg - South Africa faces a winter of discontent as wage negotiations are hammered out in a low-growth environment, contributing to the persistence of inflation at higher levels.
Winter in South Africa is the season for wage negotiations.
Even after last month’s positive surprise on inflation, potential currency shocks and wage cost pressures provide significant upside risks to the inflation trajectory, which was expected to remain outside the target band in upcoming quarters, Sanisha Packirisamy, an economist at MMI Investments and Holdings, said.
Packirisamy said this week that inflation expectations by business and trade unions in particular remained stubbornly high, posing a threat to second-round inflation pressures.
South Africa’s headline consumer inflation unexpectedly slowed to 6.1 percent last month, slightly above the target band, compared with 6.2 percent in April. Market expectation was for the consumer price index (CPI) inflation to quicken to 6.4 percent.
Economists said the inflation print offered the SA Reserve Bank a little room to pause at its policy meeting on July 21.
Kuben Naidoo, the deputy governor of the Reserve Bank, said in February that wage settlements above inflation and productivity growth threatened to undermine employment and posed a significant upside risk to the inflation outlook.
“Settlements of this nature may force the Reserve Bank to adopt a tighter monetary policy stance in order to curtail their second-round inflation impact.”
Reserve Bank governor Lesetja Kganyago said this week that South Africa was facing a policy dilemma of high inflation and low growth.
Growth is sluggish and the central bank expects it to be just 0.6 percent this year.
The Reserve Bank anticipates inflation this year to average 6.8 percent and 7 percent next year. The central bank has said year-on-year growth in nominal salaries and wages, while lower in the third quarter of last year, is still above the upper end of the inflation target range of 6 percent.
Writing in Moneyweb in April, Bryden Morton, the data manager, and Chris Blair, the chief executive at 21st Century, said it was only logical that employees would have higher increased demands than in previous years, given the inflation outlook.
“This, however, comes at a time when the South African economy is under pressure and expecting even further reduced levels of growth than were forecast last year.”
The two said the current economic environment required business and labour to negotiate in good faith and reach agreements that were fair to both parties. “If business is coerced into accepting large wage increases, this will almost certainly come at the cost of increased unemployment. Similarly, if businesses are inflexible and provide salary increases which are below the inflation rate, employees’ standards of living will drop.”
According to the latest Salary Trends survey by ECA International, companies in South Africa are forecasting pay increases of 6.9 percent for staff this year, based on inflation forecasts of 5.9 percent.
Andrew Levy Employment Publications reported an average wage settlement rate in collective bargaining agreements of 7.7 percent in 2015 from 8.1 percent in 2014.
Wage negotiations at Eskom, and in the automotive, tyre and motor sectors are already in progress. At the beginning of the month, the National Union of Metalworkers of SA (Numsa) said in the first round of negotiations, these sector employers were taking a tough line. In particular, they were opposed to the demand for one-year agreements.
Patrick Craven, a spokesman for the union, said: “The auto employers say that Numsa’s demands are too high for one year and they would prefer a three-year agreement. In the tyre sector, negotiations have collapsed because employers are refusing to negotiate directly as they have appointed a consultant, Johnny Goldberg, to negotiate on their behalf, which Numsa rejects.”
On Wednesday, the the National Union of Mineworkers said it had noted the latest wage offer by Eskom of 7 percent across the board and that it was going to seek a mandate from its members.
This was after Eskom had offered 5.5 percent.
The Association of Mineworkers and Construction Union is due to make its wage demands for platinum companies. The platinum sector is still reeling from the effects of a record five-month strike in 2014, led by the union, when it sought a more than doubling in wages to R12 500.
In the end, workers settled for raises of around 20 percent annually.
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