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Salary Trends Survey 2018/19: Salary rises beat predictions, but reality bites for some

For the third consecutive year, ECA’s Salary Trends survey found that the average salary increase for locally employed staff around the world was 4% in 2018.

While European and global median salaries have remained stable, nominal increases have surpassed predictions made last year in two regions (Africa & Middle East and Americas) as shown in the chart below. This is in stark contrast to a general trend in recent years which has seen less generous salary rises than anticipated.  Asia Pacific remains the only region where actual increases were lower than predicted. 

Nominal and real salary increases

Driving the unexpected increases in the Africa & Middle East region this year have been Egypt and Nigeria, where salaries increased by 3.5% and 2% respectively more than originally forecast. In the Americas, the relative salary stability in the region has been offset by Argentina, which is suffering a severe recession that was not anticipated - we will discuss this in more depth later in this article. 

In 2019, nominal increases globally are expected to remain stable at 4%. Every region’s forecast awards are expected to mirror those received in 2018, except for the Africa & Middle East region where employees are expected to see larger increases than were awarded in 2018. 

Reality bites: Inflation and its impact on salary awards 

When calculating pay increases, inflation is a key consideration for employers in ensuring that employees are not left any worse off from year to year. By comparing nominal increases against inflation, it is possible to arrive at salary awards in ‘real’ terms which shows the change in buying power for the employee. As the chart above illustrates, real awards can differ considerably from nominal increases. In 2018, the real median global salary increase stands at 1.3%, with next year’s forecast to be slightly lower at 1.2%.  

Naturally, staff in countries that experience high inflation are likely to be awarded higher nominal increases in an effort to offset the higher cost of living; however, as the country results in the chart below show, higher nominal awards are not always enough to offset high levels of inflation. The five countries in the chart represent the surveyed countries that have experienced the highest levels of inflation this year. While each country ranks in the top ten for the highest nominal increases, they also make up five of the top six lowest real pay awards. From a closer analysis of the countries below, the impact that a country’s currency may have on inflation - and therefore on salary awards - becomes apparent. 

In Turkey, heavy borrowing, loose monetary policy, poor relations with the United States, the imposition of sanctions by the Trump administration, and President Erdogan’s undermining of the independence of the central bank, have all contributed to the country’s currency crisis. Since January, the lira has lost more than 34% of its value against the dollar. A difficult time for locally employed staff in Turkey was predicted last year but has been even worse than originally anticipated. Despite salaries rising by 9.5%, among the highest increases in the world, continuing inflation in the wake of poor economic performance have seen median salary decreases of 5.5% for staff in real terms, against a prediction of -1.3%. Next year, the situation is expected to deteriorate further. Despite forecast nominal increases of 10%, slightly higher inflation means that forecast real terms salary decreases of 6.7% are expected.

Argentina, where salaries have seen a complete reversal from the forecast situation in last year’s report, provides an interesting example of the volatility that can exist around salary trends. Early optimism generated by Mauricio Macri’s market-friendly policies, and the confidence this fostered in the economy, resulted in forecast real pay awards for Argentina of 7.2%.  This confidence quickly diminished. The peso dived, losing more than half its value, and inflation, rather than experiencing a significant fall as was predicted, has soared to well over 30% - causing the central bank to raise interest rates to a world-high of 60%. Instead of the predicted 7.2% real salary increase, which would have been the highest in the world, staff in Argentina have seen the largest real decreases in wages, with the buying power of salaries down 11.6%. In 2019 local staff in Argentina are once again forecast to receive the highest nominal salary increases in the world, but are expected to see the buying power of their salaries drop by 8.7% - the worst predicted for any country. 

A depreciating currency does not necessarily lead to economic problems and low salary awards. For example, following a stellar 2017, the Indian rupee hit a record low against the dollar in August, falling more than 10% over the course of the year. Despite the currency’s contrasting fortunes over the last two years, inflation is forecast to remain steady, as are nominal increases, with Indian employees anticipated to receive the most generous real pay awards in the world next year at 5.1%, up from a 4.5% real increase this year. 

VAT’s impact (or lack of it!) in the Gulf

In early 2018, in the wake of years of low oil prices, two of the countries of the Gulf Cooperation Council (Saudi Arabia and United Arab Emirates) were forced to end tax-free living and introduce VAT (at 5%) in a bid to diversify their incomes. As a result, inflation was expected to rise and the effect this might have on wages became of particular interest to employers in the region. The chart above shows the impact on inflation and salary increases. (N.B. The other four GCC states were supposed to introduce 5% VAT at the same time, but have been delayed; Bahrain will launch VAT on 1 January 2019, while Oman and Qatar plan to do so later in 2019, and Kuwait in 2021.)

Pay awards have not been significantly affected by the introduction of VAT. As the chart shows, despite the implementation and resultant increase in inflation, nominal pay awards for 2018 have been very consistent with those awarded in recent years and those anticipated for next year. Nominal awards for both the UAE and Saudi Arabia were as forecast at 4% and 4.4% respectively. However, a lower than expected spike in inflation in Saudi Arabia led to more generous real terms salary awards, while the opposite was true for the UAE. Next year, salary increases are anticipated to remain stable at 4% for both countries, against inflation figures of 1.9% for the UAE and 2% for Saudi Arabia. Real increases in both countries are expected to improve again in 2019 as the effects of the VAT introduction feed through the economy. 

Although VAT is yet to be introduced in Qatar, the story there is much the same. Despite a forecast leap in inflation of 4%, median salary increases have remained steady at 4.6% after nominal increases of 4% and 4.1% in 2017 and 2016, respectively. 

Oman, however, provides an interesting example this year. With an inflation forecast of 3.2% due to the expectation of VAT being introduced, employers awarded nominal increases of 4.8% to local staff, the highest in the Gulf. However, as the tax was not implemented, inflation in the sultanate for 2018 was only 1.5%, much lower than forecast, putting Oman in the top 10 real salary increases in 2018 at 3.3%. This year employers in Oman seem to be learning lessons from the experiences of UAE and Saudi employers, and in 2019, nominal increases are set to fall to 3%, the same as in 2017, against inflation of 3.2%, potentially leaving employees in Oman worse off by 0.2% next year.  

The outlook for 2019

Countries
Global ranking
Real salary increase 2019 (%)
India
1
5.1
Vietnam
2
4.9
Indonesia
3
4.2
China
4
4.1
Thailand
4
4.1
Bangladesh
6
3.9
Cambodia
7
3.4
Sri Lanka
8
3.2
Korea Republic
9
2.7
Malaysia
9
2.7
Ukraine
9
2.7

Once again, countries in the Asia-Pacific region dominate the rankings of highest forecast salary increases; 14 of the top 20 countries in the list, and all but one of the top 10 are Asia-Pacific locations, with Ukraine the only other country to claim a place. Low inflation and higher productivity mean that economies, and therefore local salaries, are growing rapidly in the region. The median real increase is forecast to be 2.7%, down slightly from 3% this year but still considerably more generous than the global median of 1.2%. Unsurprisingly, given its status as the world’s fastest growing economy, India, ranked third for real salary increases this year, is forecast to see real salaries rise by 5.1% in 2019. Vietnam and Indonesia, two other rapidly expanding economies, complete the top three and China, ever-present within the top 10 of forecast increases, ranks fourth.  

Staff in other emerging markets are not anticipated to be as fortunate as those in Asia, with local employees in Argentina, Turkey, Nigeria, Egypt and Algeria all forecast to receive real salary decreases again next year. Moreover, the volatility that has characterised this year’s results for some countries could be exacerbated next year by any escalation in the US-China trade war, which IMF head Christine Lagarde has warned could send shock waves through already struggling emerging markets, raising the prospect that employees in other emerging nations could see negative impacts on their salary awards over the next 12 months.  

It is not only emerging markets like Argentina or Turkey that are characterised by unpredictability. With the date for Britain’s withdrawal from the European Union set as March 29, 2019, employers and staff alike will be closely monitoring the situation in the United Kingdom over the coming months. In 2018, on the back of lower than expected inflation, real salary increases at 0.4%, though low, were double those predicted by last year’s survey. However, the impact of Britain’s exit from the EU remains uncertain. The deal that Theresa May’s government has negotiated with the EU 27 (which at the time of writing could yet be rejected by parliament or the member states), any altered deal, or indeed a lack of any deal at all, may have significant and wide-ranging implications for both inflation and salaries. Currently, nominal salaries are expected to remain relatively stable, up 0.1% on 2018 to 3%, but lower inflation forecasts mean an anticipated real salary increase of 0.8%. 

Relatively low inflation means the rest of Europe looks set to maintain its 2018 real salary growth of 0.8%, with staff in Russia and the Ukraine, benefitting from significantly lower inflation, set to receive the largest real increases in the region by a considerable margin at 2.3% and 2.7%, respectively. 

Globally, despite the uncertainty, the forecast picture for most countries is one of stability. Median nominal salary awards are expected to remain steady at 4% against a real median increase of 1.2 %, slightly lower than 2018’s figure of 1.3%. Nevertheless, employers and employees alike should anticipate considerable variation in awards from country to country. As this year’s results have shown, the dynamics at play surrounding the local employee salaries are complex, and unexpected economic developments can have a major effect on salary awards for locally employed staff.

Nominal increase: the total increase in salary, including inflation/cost of living increases plus performance/merit-related increases. 

Real increase: the nominal increase minus the increase in inflation.

  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 69 countries. 

To find out more about the 2018 Salary Trends survey and its findings, the latest press releases are on the ECA news page.

The latest currency and inflation news is covered in ECA’s regular blogs.

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

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