Sign in

Salary Trends 2017/18: Real wage growth continues, but not for everyone

The general outlook

According to ECA’s latest Salary Trends Survey, the median salary increase for local staff around the world was 4% in 2017. This is identical to the results for 2016, and is also forecast to remain at this level in 2018.

So, how do these results shape up with the predictions made last year?

On the face of it, last year’s predictions were generally accurate, forecasts for just over half of countries were within 0.2% of the actual median change and three-quarters were within 0.5%. 

Interestingly, upon closer inspection, the results were generally lower than forecast.

 

This was particularly the case in the Africa & Middle East region - with Algeria and Tanzania most affected as salaries increased by 2.1% and 2.7% respectively less than anticipated. Actual increases were also lower overall in the Asia Pacific region, but the general stability in the Americas and Europe helped predictions for these regions to be accurate.

In all regions except the Americas, nominal salary increases are expected to be higher in 2018. However, forecasts of higher pay awards than actually materialise has been a continuing trend in recent years, so this optimism should be tempered with a degree of caution. Indeed, despite similar forecasts by companies in last year’s survey, around half of the countries surveyed saw a reduction in the increase awarded compared to predictions.

Inflation can prove the difference

The importance of factors such as company and individual performance, productivity, wider compensation budgets or competitor activity when calculating pay awards is clear, but it is also essential to consider the impact of inflation on pay awards to ensure your employees aren’t unintentionally left worse off. Countries with more extreme levels of inflation do tend to have higher nominal increases to compensate, but even in more stable countries inflation can be a major factor in how far their annual pay award goes.

This can be demonstrated by looking at the ‘real’ salary increases – calculated based on the difference between the nominal salary increase and inflation. In real terms, employees in 59% of countries saw a lower increase than expected, and inflation was the main driver in the differences.

36 out of 71 countries witnessed higher actual inflation in 2017 than was forecast last year, yet the pay award was only increased in 16 countries. In fact, pay rises in 35 countries were even lower than expected. As a result, the countries that experienced the greatest changes in inflation also saw the greatest differences between forecast and actual real salary increases.

 
Difference in forecast vs actual figures for 2017 (%)
Countries
Inflation
Nominal increases
Real increases
Argentina
6.4
2
-4.4
Egypt
5.3
0
-5.3
Turkey
2.7
0.1
-2.6
Mexico
2.6
0.1
-2.5
Kenya
2.5
-0.3
-2.8
Kazakhstan
-2
0
2
Bahrain
-2.1
-0.6
1.5
Qatar
-2.2
-0.3
1.9
Saudi Arabia
-2.2
-0.7
1.5
Myanmar
-2.6
0.5
3.1

This chart shows the ten countries with the greatest differences in forecast and actual inflation between the two most recent surveys. The majority of countries saw nominal increases move in the same direction as the changes in inflation, albeit to a lesser degree. As a result, the countries with the greatest inflationary changes saw the most significant differences in real terms, thus demonstrating the impact of inflation on how much better or worse off an employee will feel.

Beware currency shocks

The performance of a nation’s currency can have a significant effect on inflation and with the impact of inflation often being the difference between your staff being better or worse off in real terms, currency movements can seriously affect the pay situation.

The British pound weakened after the UK’s vote to leave the European Union, with the resultant increase in inflation in line with last year’s forecasts. Many of the countries that experienced inflationary changes this year also had their currencies move significantly in between surveys. 

The diplomatic rift between Turkey and the USA exacerbated the strength of the dollar against the lira, the uncertainty surrounding the North American Free Trade Agreement weighed heavily on the Mexican peso after the election of President Trump and import-dependent Egypt was hit hard by its currency devaluation in November 2016.

In each of these three cases, the currency drop was followed by a sharp increase in inflation, resulting in actual inflation figures above those forecast last year. However, despite the situation changing markedly, nominal pay awards remained almost identical to those forecast the previous year and employees received real-terms pay cuts.

This shows that sudden increases in inflation do not always lead to companies re-evaluating their strategy straight away. Companies frequently look to monitor the situation before making any changes, and often inflation cools and returns to previous levels without any major changes to salary increases. In addition, the worsened economic climate that often accompanies significant currency change can adversely affect business conditions and performance, which in turn can affect compensation budget planning. 

Further currency devaluations could well occur in 2018, for instance Nigeria could be vulnerable if there is a loss of oil revenue or if the government tries to unify the multiple exchange rates. If any countries do experience currency shocks, companies operating in those locations will need to keep a close eye on the situation as it develops.

The impact of VAT in the Gulf

In January 2018, the countries of the Gulf Cooperation Council will introduce 5% VAT on some goods and services for the first time. The impact of this on inflation, and therefore real-terms salary increases, is forecast to vary across the region. 

The addition of VAT does not necessarily mean that inflation will increase by 5% overnight, as it does not apply across the board and retailers may absorb some of the costs or have already increased prices to compensate. Indeed, although the rate is the same across the GCC nations, the application varies and therefore so do the forecasts.

 

Saudi Arabia, Qatar and Bahrain are anticipated to experience significant increases in inflation, however the forecasts suggest that the impact in the other three GCC countries will be muted.

Despite the introduction of VAT being widely publicised, forecast nominal pay awards for 2018 do not differ markedly from the actual increases for 2017. If these forecasts prove to be correct, employees in Saudi Arabia and Qatar will feel worst off, going from real-terms increases in 2017 to join Oman in experiencing real salary decreases in 2018.

The global outlook for 2018

Nominal salary increases are forecast to remain steady, with the global median staying the same at 4% and only companies in the Asia Pacific region forecasting improvements in pay awards of over 0.1% compared to 2017.

Asia Pacific nations also lead the way in forecasted real-terms increases, with a median figure of 2.7% predicted. All regions surveyed are forecast to enjoy real wage growth in 2018.

 
Global Rank
Countries
Real wage increase 2018
Nominal salary increase 2018
Argentina
1
1
India
2
6
Ghana
3
2
Indonesia
4
9
Vietnam
4
8
Thailand
6
24
China
7
20
Bangladesh
8
7
Pakistan
8
10
Cambodia
10
15
Russia
11
15
Brazil
12
15
Philippines
12
20
Singapore
14
33
Korea Republic
15
29
Taiwan
15
33
Sri Lanka
17
14
Israel
18
46
Morocco
19
33
Bulgaria
20
42
Malaysia
20
23

In Argentina, nominal salary increases are set to be 25% in 2018. Inflation is forecast to remain high, but crucially a significant fall is forecast, to 17.8% from 26.9% in 2017 as President Macri’s market-friendly policies take effect. This means employees are predicted to experience an impressive increase of 7.2 percent in real terms, the largest in the world. India, with a predicted 4.9% real salary increase, takes second place.

Despite slower economic growth, China is forecast to rank seventh in the world next year and will maintain its ever-present record in the top ten of ECA’s ranking of global real salary increases.

Although there are early signs of growth in some major European economies, expected real salary increases still lag behind those of a few years ago, indeed, real wage growth in Germany and France is expected to be less than half the rate of 2015. However, for the first time in five years, no European nation is expected to experience a salary decrease in real terms. 

Unfortunately for staff in Egypt, their misery is forecast to continue with inflation forecast to far outstrip the nominal pay awards of 10% and a similar situation is predicted in Nigeria where employees will be worse off despite hefty salary rises.

Overall, the general outlook is one of stability for most countries, with little upheaval expected. However, as we saw this year, unexpected economic developments can have a major effect. 

Definitions

Nominal increase – the total increase in salary, including inflation/cost of living increases plus performance/merit-related increases
Real increase – the nominal increase in salary minus the increase in inflation

Notes

Inflation data collected from IMF World Economic Outlook October 2016 and 2017.

  FIND OUT MORE

ECA’s Salary Trends reports are available for 71 countries. Reports include graphical and tabular data plus economic analysis and, where possible, data for specific industry groups. Free to survey participants, they can also be purchased either individually or as a full set.

  Please contact us to speak to a member of our team directly.

 

Like this article? Share it... Twitter Facebook   LinkedIn