5
BusinessDay www.businessday.co.za Thursday 4 August 2022
INTERNATIONAL
says high Gloom despite job growth BMW inflation will hit is kicking off ‘vibecession’ incoming orders ECONOMIC RISKS
•
Term used for periods when everything looks on the up, but people feel down as inflation chews away at wages
Conor Sen
R
ecession fears are leading, naturally, to anxiety about job losses. How many people will be thrown out of work by an economic downturn? How high must unemployment go to curb inflation? Laying off millions of workers is one way to rebalance the US labour market. But there’s another way — one that seems more likely in this inflationary economy and that’s far less traumatic for both workers and companies. We’re seeing it already: a labour market cool-down happening through shrinking pay cheques instead of job cuts. The US could be facing a downturn where most workers get a little bit poorer rather than several million losing their jobs. Companies begin layoffs when their labour expenses are too high relative to their revenues. It’s generally more culturally acceptable to reduce the workforce rather than have everyone accept a pay cut. Sometimes labour agreements or minimum-wage laws make pay cuts impossible, leaving terminations as the only alternative. But, current high inflation in the US makes the situation more fluid. Even if a company is selling fewer widgets, revenue
might be rising because of the pricing environment. For example, maybe unit sales are down 2%, but revenue is up 8% because the company raised prices by 10%. In that scenario, the company could tell its workforce that nobody was getting a raise — essentially a pay cut in inflation-adjusted terms — and end up with labour expenses declining as a percentage of revenue without letting anyone go. So, rather than thinking about higher unemployment as an inevitable outcome of a recession, companies could achieve the same cost reductions through a broad decline in payrolls, adjusted for inflation. In every recession going back to the 1960s, total inflation-adjusted wages have fallen by at least 1.5%. And while this measure is still up 1.1% year on year, that’s incredibly subdued when the number of jobs has grown by 4.3% year on year — the fastest pace of job growth in more than three decades outside the pandemic. Interestingly, in the months since February, inflation-adjusted wage and salary disbursements are down by 1.6% even as the US added 1.5-million jobs. I’m still sceptical about the likelihood of a recession in the short term, largely because of
Tough times: Unlike the US, where jobs have bounced back, SA is not experiencing a ‘vibecession’, as unemployment soars and many don’t even earn a pay cheque that can be cut. /Fani Mahuntsi/ Gallo Images the level of job growth and labour demand throughout the economy. So, admittedly, this finding gives me pause. Four months isn’t enough to make a definitive conclusion. Much of the hot inflation data we’ve seen since February is
from rising energy prices, which are now reversing; oneoff rises in airfares as consumers returned to the skies after two years avoiding travel; and the 2021 surge in rents finally flowing into the consumer price index (CPI) data.
But if the trend persists, it does seem like we’ll end up describing the 2022 labour market in negative terms. This dynamic is very different from other recent economic soft patches. During the eight months the US
economy experienced recession in 2001, employment fell by 1.2%, or 1.6-million jobs. But because inflation was so much lower at the time — headline CPI rose by 1.6% in 2001 — the wages of most workers who kept their jobs were unaffected by the downturn when accounting for inflation. Now the US economy is adding hundreds of thousands of jobs each month, while at the same time tens of millions of workers have seen their wages shrink on an inflation-adjusted basis. It’s the reason most Americans are unhappy with the economy even as we’re adding lots of jobs. Social media finance influencer Kyla Scanlon has coined the term “vibecession” to describe this economy where millions of jobs have been added, home prices have boomed, consumers are swarming airports and resort towns, yet everyone is feeling gloomy. Playing off the term “jobless recovery” that was used to describe the aftermath of the 2001 and 2008 downturns, “jobful recession” is popping up on Twitter now. Both reflect the need to find a new way to evaluate today’s labour market adjustment, which appears to be disconnected from job growth and unemployment data. /Bloomberg
Wilfried Eckl-Dorna BMW says new vehicle orders are retreating from high levels as inflation and higher interest rates hit consumers, making the company the first among major carmakers to turn more cautious. The Munich-based manufacturer sees vehicle orders normalising towards the end of the year, particularly in Europe, it said on Wednesday. Current order books are at an all-time high because of pent-up demand due to the ongoing semiconductor shortage. “For new incoming orders, we register a reduction compared to last year,” BMW CEO Oliver Zipse said on a call. The retreat was most noticeable in Europe among the 1- and 2-Series compact vehicles, while demand for BMW’s lucrative X-Series SUVs and the 5Series sedans was still strong, he said. Demand for electric vehicles has stayed strong across the board and battery-only cars are set to account for 10% of total deliveries this year, he added. BMW stuck to a forecast of automaking returns at between 7% to 9% for the year on the back of strong vehicle prices and model line-up, as well as demand for used cars. The manufacturer also said it would not be able to fully pass on rising materials costs with internal savings helping to soften the blow. The company is sounding an early warning bell even as car
demand has remained high so far amid a worsening global economic outlook and record inflation. Mercedes-Benz and others have raised their expectations for the year recently, while warning that economic risks are building. BMW is the first carmaker “to signal caution on the demand”, Bernstein analyst Daniel Roeska said an a note. “This implies weakening sentiment today, even as production ramps up across the sector.” The shares slumped as much as 6.2% in Frankfurt, the most since March 10.
SAVINGS
The carmaker is also stepping up preparations for a potential gas shortage in Europe. BMW runs 37 gas-powered facilities that generate heat and electricity at its factories in Germany and Austria and is considering turning to local utilities instead. “Shifting energy generation in that magnitude is not trivial and will be very expensive,” Zipse said. He also joined warnings by plastics maker Covestro about the effect of a total gas supply shutdown on the broader supplier network. “It’s not our direct suppliers, but the suppliers of our suppliers, those whose production is dependent on process gas” who are at risk, Zipse said. “For them, production will come to a standstill pretty soon if natural gas is completely cut off.” /Bloomberg
INSIGHTS: BONITAS
Scheme committed to quality health care After a bumper •2021, Bonitas is confident it will retain and grow its membership, writes Lynette Dicey
C
ovid-19, which completely discombobulated the world, had an unexpectedly positive effect on the fiscal health of Bonitas Medical Fund. The fund, which celebrates its 40th birthday this year, announced R7.4bn in reserves at year end 2021. Bonitas outperformed all expectations in 2021 in terms of all key indicators: positive membership growth, a strong investment performance and boosted reserves. This is despite the pervasive uncertainty and loss caused by the continuing pandemic, according to Bonitas chief financial officer Luke Woodhouse. “One area that has seen a particularly healthy growth is our innovative Edge offering, called BonStart,” says Woodhouse. “Introduced in 2021 at an affordable price point, with virtual care as its base, it exceeded membership targets by 41.3%. But, more important, is the 33.9 average age profile. With this in mind, we introduced a second option for 2022 called BonStart Plus.” The fund announced that the number of principal members exceeded 340,000 with more than 700,000 beneficiaries. “The value of quality health care became even more important during the pandemic
Luke Woodhouse … proactive. and, as the world starts to recover, members are holding on to the security of private health care,” says Woodhouse, adding the fund looks forward to continued growth in 2022. “Covid-19 continued to impact the health care industry in 2021 and we had to be agile in our response to the dynamic changes within our operating landscape. We had the advantage of learnings from the previous year to guide us when facing difficult decisions, together with our organisational culture and management style that had evolved over the past two years.” Despite these challenges, Woodhouse says the fund’s strategic focus on connecting with customers ensured it retained members. “We had an exceptional start to 2021 when 28,500 new members joined in January. Importantly, 60% of new members were younger than 35,” he says. Bonitas reported an average return of 16.2% CPI +11.5% on its investment portfolio, well above the target of 8.1% (CPI +3.5%). There was significant impact on savings following the collective hospital tariff negotiations in 2020. “Bonitas’ proactive approach to realigning managed care
initiatives, with a particular focus on hospital negotiations, resulted in a savings of R198m,” says Woodhouse. In 2021, Bonitas was selected as the preferred amalgamation partner for Nedbank Medical Aid Scheme (NMAS) — a restricted membership medical scheme for Nedbank and Old Mutual employees with 26,283 principal members. “The amalgamation, a highlight for the fund, contributed R613m to reserves following the transfer on January 1 2022,” says Woodhouse. Given the significant buildup of reserves in 2020 and the challenging economic circumstances facing its members, Bonitas set historically low premium increases in 2021 without jeopardising the sustainability of the fund. “We implemented a competitive weighted average contribution increase of only 1.3% higher than CPI. Under normal circumstances, these are set at a minimum of CPI +3.5%,” he says. Its medium-term objective is to sustain solvency levels above 30% and to use its bolstered reserves to benefit members, Woodhouse says. As suggested by the Council for Medical Schemes it reinvested R600m of its reserves to reduce the contributions increases for 2022. Hospital costs dominated claims in 2021, reaching R6.45bn, up 9.52% compared to 2020. This, says Woodhouse, is in line with the moratorium on
WE HAD TO BE AGILE IN OUR RESPONSE TO THE CHANGES IN OUR OPERATING LANDSCAPE
elective surgeries being lifted. Hospital negotiations, including day hospitals and home-based care, resulted in a saving of R9.5m. Active disease risk management interventions, which focuses on outcomesbased frameworks to improve clinical outcomes, reduce admissions and readmissions and improve medicine adherence, resulted in savings of more than R14m. “We expect the pandemic challenges to remain, whether in new waves or new variants. Although the potential impact is unsure, we remain committed to promoting vaccination as an effective countermeasure,” says Woodhouse. The fund is confident that it will continue to retain and grow its membership, and maintain the momentum gained over the past two years, he says, adding it is mindful of macroeconomic factors that continue to stifle consumer spending. In terms of regulatory reform, he says Bonitas looks forward to positive change that will ensure the scheme’s sustainability while meeting members’ needs. “We remain committed to providing quality health care that is more accessible and affordable to even more South Africans in 2022.” Bonitas’ 2021 performance at a glance: ● R1.8bn gross health care result; ● Reserves reaching R7.4bn; ● Net surplus of R1.4bn; ● Solvency ratio of 36.5%; ● Average return of 16.2% equating to investment income of R1.2bn; ● R8.32bn total investment portfolio value, excluding cash; ● Health care cost savings initiatives realised R487m.
JOIN BONITAS FOR MORE BENEFITS THAT DON'T COME OFF YOUR SAVINGS LIKE A BENEFIT BOOSTER, VIRTUAL CARE AND MORE...
2021/2022 ASK AFRIKA ORANGE INDEX AWARD FOR SERVICE EXCELLENCE!
SMS SWITCH TO 33035 OR VISIT BONITAS.CO.ZA TO JOIN SMSs CHARGED AT R1.50. FREE SMSs DO NOT APPLY. Ts & Cs APPLY.