Salary increases are inexorably linked to inflation; where inflation is one of the most important determinants when deciding on the salary increase. Cognisance must be taken of the fact that inflation in South Africa is notoriously difficult to predict for the main reason that the currency exerts a significant influence on inflation. This interdependency highlights the difficulty with forecasting an equitable salary increase for employees.
Despite this complexity, there is a robust method by which to devise an informed and scientifically formulated salary increase forecast, which can be employed during the budgeting process.
In our original article (https://www.axiomatic.co.za/projected-2020-south-african-salary-increases/) we forecast average inflation for 2020 of 4.7%, significantly lower than most market commentators and especially the SA Reserve Bank’s Monetary Policy Committee (“MPC”). We are delighted that they have now reduced their forecast inflation rate in line with ours.
At the January MPC meeting, the new forecast for inflation was 4.7% for 2020; significantly lower than the previous 5.1%. Further, the Bureau for Economic Research is now forecasting 4.8% ( previously 5.0%) and the Reuters Econometer survey 4.6% (4.7%).
Our inflation forecast of 4.7% for 2020 is therefore now closely aligned with the view of most market participants.
The next process in the scientific methodology we employ is to establish the quantum of the “real increase”. A real increase is defined as the increase after inflation has been taken into account. As an example, if the salary increase is 6.0% and inflation is 4.0%, then a 2.0% real increase has been granted. The table below illustrates the real increases granted by South African companies over the last 17 years:
Our original article furnished some historical context why the “rule of thumb” of a 2.0% real salary increase was no longer valid, feasible or affordable despite the fact that the average increase granted by South African companies over the last 17 years was 1.7%.
Once again, we retain our assertion that a 1.0% real salary increase is equitable to all stakeholders.
If one was therefore to simply apply a formula, one would derive a salary increase for 2020 of 5.7% calculated as follows:
There can be little doubt that the South economy is struggling:
- Our model is currently forecast growth in 2020 of a meagre 0.7%. This remains significantly lower that that forecast by the MPC Committee at their January 2020 meeting; they anticipate 1.20% which we consider to be optimistic and unattainable. The World Bank is more aligned with our forecast and anticipate growth of 0.90% this year;
- Eskom remains a significant danger to the economy simply because it is too big to fail. Unreliable electricity supply and load shedding exacerbates growth constraints. However, most importantly, it negatively impacts the profitability of most, if not all companies, in South Africa;
- A possible downgrade in the country’s rating will only exacerbate the lack of growth;
- Most if not all companies are finding it difficult to pass on the rising input costs to consumers which concomitantly reduces profitability;
The scientific formula would suggest a salary increase of (4.7% + 1.0%) = 5.7%. However, as a result of low growth, adverse business conditions and affordability, our recommended salary increase for 2020 remains unchanged: