WAGE settlement averages for this year in South Africa could be higher than in the previous one, Bank of America Merrill Lynch global research forecast on Wednesday.
The bank sees wage settlements likely averaging 8.5% after 7.6% last year, which could add pressure on already financially stretched employers, forcing them to hold off employment and expansion plans.
Steep wage demands, particularly by mineworkers, were among factors that drove the rand weaker this week. The local unit depreciated to levels of about R9.53/$.
Bank of America Merrill Lynch calculates that a 10% depreciation in the rand, if sustained, can led to a 0.6 to 0.9 percentage point increase in the consumer price index, which is used to measure inflation, with a nine-month lag.
"Another concern for the currency and inflation has been a worrisome start to the annual wage round, particularly in mining," Bank of America Merrill Lynch global research South Africa economist Matthew Sharratt said. "The weakening rand implies upside inflation risks."
Mr Sharratt said the tone for a tough wage round had been set by fractured trade union relations in the mining sector and an apparent struggle for membership between the National Union of Mineworkers (NUM) and the Association of Mineworkers and Construction Union (Amcu) in the platinum sector.
NUM has already indicated it will demand 15% wage increases for its members when negotiations start with gold and coal sector employers. For entry-level workers, it would demand a 60% pay hike.
The negotiations are expected to start in the next three weeks to give gold and coal sector employers enough time to discuss the demands. Amcu is yet to announce its demands.
"We project wage negotiations will be fraught with a high risk of labour unrest in the coming weeks given the cost pressure mining companies are under, plans for restructuring and the backdrop of weakening commodity prices," Mr Sharratt said.
"Possible negative news flow is a further risk to the embattled rand, in our view."
Bank of America Merrill Lynch view is for the rand to end the year at R9.50/$. The bank notes, however, that the rand could "overshoot" this forecast in the near term.
Investec Group chief economist Annabel Bishop said the "strike season" had commenced and was delivering salary and wage demands, and some increases already, well in excess of inflation. "The rise in living costs in South Africa is prompting the development of a nascent wage-price spiral, with inflation up from 3% in 2010 to close to 6% currently as the rand depreciated from R7.00/$ in 2010 to R9.50/$.
"Higher administered price inflation (8.9% year-on-year) has also been instrumental in the outcome."
The weak rand and high inflation are expected to have formed part of the Reserve Bank’s monetary policy committee meeting, which concludes on Thursday with the announcement of interest rates.
"We believe the increasingly stagflationary mix of incoming data will keep the (central bank) on the sidelines, leaving the repo rate unchanged over the coming year, despite concerns over the poor growth outlook," Mr Sharratt said.
