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Salary Trends 2020/2021: How has Covid-19 impacted on local salary awards?

When it comes to salary awards for local staff, three of the main factors at play are inflation, economic growth, and unemployment; and this year, all three have been dominated by the consequences of the Covid-19 pandemic. ECA’s Salary Trends Survey asks companies about their local staff salary increases for the current year and their forecasts for next year, and this article will look at what the latest results tell us about how the Covid-19 pandemic has impacted local salary awards in 2020 and what may be ahead in 2021.

The impact of Covid-19

 

The effect of the Covid-19 pandemic on the results is best demonstrated by comparing this year’s findings with what was forecast for 2020 in last year’s reports. The actual global nominal increase for 2020 was only 2.5% compared with a forecast of 4%. However, in real terms - which represents the salary increase once inflation has been applied to the nominal increase - the increase was found to be 1.2%, just 0.2% less than forecast. 

Economic turmoil caused by the pandemic had two main effects: first, increasing the number of salary freezes, and second, dampening demand for goods and services, resulting in lower inflation. 

The uncertainty surrounding the pandemic has meant companies have been hesitant to commit to increasing salary budgets and, on average, 38% of respondents globally have implemented a salary freeze, in comparison with just 2% in 2019.

New Zealand, for example, has received much global media coverage this year for its excellent success in containing the virus but has, at least in the short-term, paid the price economically with the country entering its deepest recession since at least the 1980s. 54% of responding companies froze the salaries of staff in New Zealand, making it the country with the third highest percentage of salary freezes in the world. Even Morocco and Algeria, the countries seeing the lowest levels of salary freezes (21%), had more than ten times the global average of salary freezes seen in 2019. This substantial increase in the number of salary freezes has driven down overall nominal increases: in no countries surveyed this year did nominal increases surpass forecasts, and on average they were over a third lower than anticipated. 

Companies reviewing salaries in the first quarter of the year were less likely to freeze pay in 2020 but were more likely to freeze pay in 2021. This trend can be explained by the scale of the economic consequences of the pandemic not becoming evident in most parts of the world until later in the year.  

Another major impact of the pandemic is that it has resulted in lower than expected inflation, meaning that despite lower nominal increases, the real salary increases are much closer to those forecast last year.

2020 Inflation rates – forecast v actual
Region
Forecast Inflation rate (%) Actual Inflation rate (%)
Africa 5.3  4.4
Australasia 1.9  1.2
East Asia 1.9  0.4
Europe 1.7  0.8
North America 2.2  1.1
South America 3.3  2.8
South Asia 5  5.3
Southeast Asia 2.4  2.3
The Middle East 2.2  1

When the pandemic began, many analysts predicted soaring inflation, as a direct consequence of the disruptive effect nationwide lockdowns would have on supply chains. This, coupled with much lower nominal increases, would have led to much lower real terms salary awards than forecast. 

However, while there have been isolated spikes in prices as consumption has changed - with many countries seeing food price rises, for example - these predictions failed to account for the effect nationwide lockdowns would have on demand, which declined significantly during the crisis, particularly for fuel. This lack of demand has meant that inflation has actually fallen short of forecasts in almost every country we surveyed.  

The effect of lower-than-forecast inflation on this year’s real salary results has been to mostly offset the impact of the lower nominal salary increases. Without the dampening effect on inflation, real salary results would have been much lower than forecast, but more than a third of countries saw real salary increases above those forecast. This was particularly the case in Europe, with 14 countries surveyed in the region seeing higher real increases than forecast including the UK, Germany, and France. North American countries also saw real salary increases surpass forecasts, as did several Asian countries, including Taiwan, Japan, and Hong Kong.

Industry-specific trends

While the pandemic has impacted all industries, our analysis has shown that the effects were far from uniform.  Perhaps most visible have been impacts on the retail and leisure sectors. As governments across the world have strived to reduce contact between people to stem the spread of the virus, lockdowns have forced stores, gyms, and leisure centres to close, essentially nullifying these industries’ potential to make money. Subsequently, staff working in these sectors have generally seen the lowest salary awards across the world. Across almost all countries where industry data for retail and leisure was published, including major economies like Australia, Hong Kong, the US, and the UK, we saw no salary increases at all. In fact, the only two countries where staff working in retail and leisure saw their salaries increase were China and Malaysia. Conversely, local staff working in chemical and pharmaceutical industries have seen higher salary increases with no shortage of funding for those companies at the forefront of the fight against Covid-19. In China, for example, the median increase for local staff working in chemical and pharmaceutical industries was 6.8% in comparison with an overall median of 3.8%. 

2021 forecasts 

 

For 2021, while we anticipate a better year, forecasts remain considerably less optimistic than pre-pandemic. The global nominal salary increase is forecast to rise to 3%, still lower than the 4% rise in 2019, while the real increase is anticipated to remain stable at 1.2% as inflation is expected to rise next year. 

2021 is expected to see salary freezes fall across all regions. 19% of respondents globally are forecasting a salary freeze; half the number who did so this year. In every country, we expect to see a fall in the number of salary freezes, and the effect of this would be to push average nominal increases up to 3%. Of course, the proportion of freezes remains high, and this accounts for the nominal salary increases remaining below the levels consistently forecast in the years before the pandemic. 

While the proportion of salary freezes is forecast to fall, global inflation looks set to rise. The potential for the cost of goods and services to rise because of a release in pent-up demand as consumers lift spending, and potential increases to the cost of goods and services because of higher production costs caused by persistent supply disruptions, means inflation is anticipated to increase in most of the world. As a result, nominal increases will be tempered by the higher inflationary pressure, and real terms salary awards are therefore forecast to remain stable at 1.2%. 

Forecast real salary increases for 2021
Countries
Global ranking
Anticipated real salary increase 2021 (%)
Indonesia
1
3.8
Israel
2
2.8
Colombia
3
2.7
Singapore
3
2.7
Thailand
3
2.7
Korea Republic
6
2.6
China
7
2.3
India
7
2.3
Bangladesh
9
2.1
Cambodia
9
2.1
Oman
64
-1.1
Pakistan
65
-1.8
Turkey
66
-1.9
Nigeria
67
-3.4
Argentina
68
-28.6

Continuing a trend in recent years of high salary increases driven by sustained growth and increasing productivity, Asian economies have been the quickest to show signs of recovery from the economic shock of Covid-19 and it is Asian countries that dominate the rankings for the anticipated highest real salary increases for 2021. Conversely, the lowest real salary increases are made up of the countries with the highest level of anticipated inflation. Staff in Nigeria, Turkey and Pakistan are forecast to see real salaries decrease by over 1%, while for the fourth consecutive year, Argentinian staff see the highest real salary decreases at -28.6% as the country continues to battle a dire economic situation and inflation remains very high. 

Future uncertainty

Salary predictions are always difficult, but the future is even more uncertain than usual with several variables that could change company plans. The pandemic is of course the most major issue, and one development that would produce considerable optimism would be the successful roll-out of a working Covid-19 vaccine. In early November, there were hopeful signs that this was possible, with multiple studies announcing promising preliminary analysis regarding the effectiveness of potential vaccines, and the global economy responded accordingly with stock markets surging on the news. Any further positive developments concerning a vaccine and a potential return to normality could lead to increased demand, inflation, and subsequently salaries.

Beyond a vaccine, another factor that has a significant impact on salaries is the global trade environment, which is particularly affected by the trade relationship between the United States and China. A less aggressive foreign trade policy under a Biden administration could provide a shot in the arm for the global economy, increase demand, and subsequently raise inflation and salaries. For Europe, and particularly the UK, Brexit remains a major issue; and while a free-trade deal between the UK and the European Union would likely see no major effect on salaries, a ‘no-deal’ scenario would lead to higher inflation as a result of tariffs. This would of course increase inflationary pressure on employee salaries and could lead to lower real-term salaries. Elsewhere, whether the ongoing protests in Hong Kong will impact salaries in the region remains something we are monitoring closely, as is the VAT situation in the Middle East. 

What we do know for certain is that local salary markets remain in an uncertain place. A successful roll-out of a vaccine in 2021, as well as a bounce-back for the global economy following the economic fallout of the pandemic, would have a major impact on next year’s results, with lessons from this year showing us just how much forecasts can change.

  FIND OUT MORE

The complex macroeconomic factors at play within the setting of salaries are covered in detail in ECA’s Salary Trends Reports which are published for over 70 countries. The 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.

To find out more about the 2020 Salary Trends Survey and its findings, you can view the latest press releases on our News page.

The latest currency and inflation news is covered in ECA’s blog. You can sign up to follow our blog to receive notifications when new posts are published.

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

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