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Southern Africa  
13 March 2015

SA economy on the brink as 2015 strike season looms

South Africa - As this year’s wage negotiation season gets underway, Rian le Roux, Chief Economist at the Old Mutual Investment Group warns that another round of destructive wage disputes will have a crippling impact from which job creation, workers themselves, and the economy will not recover soon.

This comes after South Africa fared very poorly in terms of labour/employer co-operation, flexibility of wage setting and hiring and firing practices in the recent World Economic Forum global competitive rating.

Le Roux says while 2014’s platinum strikes made the headlines, it should be remembered that there were many other strikes, which led to 11.6 million workdays lost during the first nine months alone. And despite the major industrial action, not much was gained in terms of increased remuneration.

“It was calculated that collective bargaining wage settlements during the first nine months of last year came to 8%, which was only marginally up from the 7.9% for the corresponding period in 2013. And the headline wage settlement data masks the fact that workers involved in the strikes did not get paid while on strike.

The 5 month platinum strike in 2014  was crippling to the economy

The 5 month platinum strike in 2014 was crippling to the economy

Referring to the platinum strike in its September Quarterly Bulletin, the Reserve Bank noted that it could take years before workers recover the wages they had foregone during the five month strike.”  Indeed, by the time the 5-month strike ended in June last year, the revenue loss to the companies came to R23.9 billion rand and workers had lost R10.6bn in wages.

Le Roux says a host of factors continue to dog the economy, tainting South Africa’s attractiveness as an investment destination, and inhibiting job creation.

“As far as labour issues are concerned, not only is South Africa close to rock bottom out of 148 countries in terms of flexibility in wage setting, hiring and firing practices and labour/employer co-operation, but our restrictive labour regulations coupled with an inadequately educated labour force rank as the two top obstacles to doing business here.

“Faced with this reality, driving wages higher through aggressive industrial action is a recipe for disaster and could lead to less job creation, more mechanisation and government missing its ambitious growth and employment targets.”

Le Roux says that the Reserve Bank has already noted that the capital/labour ratio, a technical term for mechanisation, was accelerating in both mining and manufacturing.

“As far as labour issues are concerned, South Africa is close to rock bottom out of 148 countries in terms of flexibility in wage setting, hiring and firing practices and labour/employer co-operation" - Le Roux

“But in fact, mechanisation is accelerating broadly throughout the private sector.  This is starkly reflected in the fact that total private sector production, or GDP, was, by the fourth quarter of last year, about 9% higher than before the start of the recession in 2008, but private sector employment was about 3% lower. This bears evidence that the private sector is steering clear of employing more people as far as it possibly can.

“Moreover, in a world where technology is constantly making great labour-saving strides, where low interest rates make it attractive to replace labour with machines and where other countries are keen to compete in our own backyard, relatively poorly educated labour can ill afford to drive up their own costs, especially where violence, intimidation and vandalism, has become par for the course during wage negotiations.”

Le Roux says that the strikes of 2014 had a demonstrably negative impact on the economy, and that it was generally estimated that it directly reduced GDP growth for the full year by about 0.7%. Put differently, in the absence of the strikes, growth would have come to about 2.2%, instead of the actual 1.5%.  Add to this the fact that the electricity constraint is subtracting a further estimated 1% from annual GDP growth, then it becomes very clear that sorting out SA’s labour and electricity troubles are of paramount importance if the economy is to grow faster.

“The key focus of this year’s wage rounds will be in gold mining and the public sector.  One would hope that unions learnt from last year’s strikes so that this year’s negotiations will be smoother, involve far less disruption and that settlements are reached quickly so as to minimise damage to workers’ incomes, the industries involved and the economy at large.

“Unfortunately, initial union demands of around 15% are again out of kilter with the economy at a time when inflation is at 4.4% and possibly headed lower.

Gold“Gold mining is a sector in deep trouble in SA, with sharply falling production as ore bodies are depleted and the gold price heads downwards.  Sustained excessive increases in wage costs against a background of already sharply escalating electricity costs, will seriously threaten the entire industry.”

Le Roux points out that the public sector wage round is especially important, not only because the public sector employs about 30% of all formally employed people in SA, but especially because the state simply cannot afford the excessive initial demands of a 15% wage rise set by the unions.

“Any settlement that will result in the State’s overall wage bill, including the effect of employment changes, exceeding the budgeted 7.7% rise, could potentially result in the targeted budget deficit being exceeded. This would require more painful tax hikes next year and, in a worst case scenario, a further downgrade by the ratings agencies.

“So as this year’s two key wage negotiations get under way, the country desperately needs a far greater degree of pragmatism, and a labour leadership that fully understands that excessive increases in wage costs are simply not sustainable in the absence of matching productivity gains.

“Wage growth ahead of productivity gains will very likely result in a renewed wave of job losses in some industries, and the already large pool of unemployed people will find their chances of getting a job fade even further.”

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