Salary increases are inexorably linked to inflation; where inflation is one of the most important determinants when deciding on the amount of the salary increase. The current difficulty with attempting to forecast future inflation, is that one now needs to evaluate and incorporate the impact of the Corona virus on the economy in general, and inflation in particular.
Further, there can be little doubt that the virus and the consequential forced lockdown, will have a devastating effect on the economy – whether a business can afford to grant any salary increase this year becomes a pertinent question.
We have often stated that salary increases should be formulated by using a robust, informed and scientific methodology, which is easily defendable and can concomitantly be employed during the budgeting process.
In our original article https://www.axiomatic.co.za/projected-2020-south-african-salary-increases-january-2020-update) we forecast average inflation for 2020 of 4.7%. Recent events have necessitated a revision and our forecast has been significantly reduced to 4.1% for 2020. This prediction is higher than the South African Reserve Bank’s 3.8% forecast but aligned with the Reuters Econometer survey (4.2%) and the Bureau for Economic Research (4.4%)
We have changed our original inflation forecast for 2020 to 4.1%.
Our inflation forecast of 4.1% for 2020 is 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 (https://www.axiomatic.co.za/projected-2020-south-african-salary-increases/) furnished some historical context why the “rule of thumb” of a 2.0% real salary increase was no longer valid, feasible or affordable despite the fact that the average increase granted by South African companies over the last 17 years was 1.7%.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 5.1% calculated as follows:
However, before a final decision is made, cognisance must be taken of the following factors:
There can be little doubt that the Covid-19 outbreak will have a devastating and crippling effect on the South African economy. When announcing the 100 basis point cut in official interest rates, the MPC Committee stated that, “The Bank now expects the economy to contract by 0.2% in 2020. GDP growth is expected to rise to 1.0% in 2021 and to 1.6% in 2022.” We are afraid that this is a pipe dream. Our model is currently forecasting that growth in 2020 will be (2.1%) – the country will be in recession.
The negative growth and the enforced (albeit the correct government action) lockdown for a minimum period of 21 days, will have serious financial consequences for most companies. Previously trading conditions were difficult and the ramifications of the lockdown will only exacerbate these. Business affordability is therefore an important consideration when companies examine an equitable salary increase to grant staff.
The Reserve Bank, and our view, is that there is little chance of inflation increasing substantially over the forecast period. The Reserve Bank stated, With the downward revision to the forecast, the overall risks to the inflation outlook at this time appear to be balanced…Risks to inflation from recent currency depreciation are expected to be muted as pass-through is slow and could be offset by a wider output gap…Food price inflation is expected to remain low, in part due to better weather conditions”.
In light of the foregoing, we are amending our recommended salary increase for 2020 to 5.0%. However, the low growth, adverse business conditions, affordability constraints and the impact of Covid-19, may result in many companies not being able to afford such an increase.