JOHANNESBURG May 29 (Reuters) - Labour unrest in South Africa's mines, which threatens to spread to bigger sectors like manufacturing, is plunging the economy into a vicious cycle that may spiral into stagflation, disinvestment and more social upheaval.
South Africa's rand has lost 16 percent against the dollar so far in 2013 and hit new four-year lows this week, with mining worries triggering the latest sell-off - which picked up pace on Tuesday when data showed growth in Africa's top economy slowed to a snail's pace as manufacturing output shrank.
All of this is spooking investors and sowing the seeds of more social discontent, as data shows a strong correlation between the rand's performance against the dollar and inflation, with a time-lag of nine months.
Inflation is currently just under six percent and will accelerate, with the biggest exchange-rate impact likely on food and fuel prices, which will hit working-class households hard.
But the full impact of the rand's current weakness will only be fully felt nine months hence, after the next round of wage agreements in mining and other sectors have been hammered out.
These will be tough as worker militancy is on the rise amid a vicious turf war between a mining union linked to the ruling African National Congress and a more militant rival.
Strikes are a certainty, which will strain incomes and knock the rand further, and any wage gains wrested from companies will mostly be devoured by inflation soon after.
"There is a 9-month lag which generates the highest correlation between the depreciation of the rand and the impact on inflation," said George Glynos, managing director at financial consultancy ETM Analytics.
"Whatever disposable income you negotiate in your wage talks gets eroded away in the months that follow," he said.
This could easily fuel worker anger next year, sparking another round of strikes. Investors in turn would make another stampede for the exits, undermining the rand again and reigniting the whole cycle as inflation was spurred anew.
Of course, this cycle is not set in stone. Strike fatigue may set in with workers, many of whom have high levels of debt, which could temper such action or curtail wage demands.
And the dance between the currency and prices can go two ways. The rand, a highly liquid emerging market currency, can change direction quickly and put the brakes on inflation.
But there are plenty of causes for concern. Last week, as it kept interest rates on hold, the central bank said the "risk of a wage-price spiral remains high."
The risks have probably never been higher, given the state of labour militancy and the pent-up expectations of workers at the bottom of the pay scale who have seen little improvement in their lives two decades after the end of apartheid.
The typical South African mineworker has eight dependants, many of whom live far from the shafts in remote rural areas. Despite above-inflation pay increases in recent years the worst paid still only make close to 4,000 rand ($420) a month - around half the average wage in the industry, which has vast earnings disparities.
Inflation in such circumstances works through the household pipeline in steadily corroding ways.
First, prices in mining communities jump as the workers return to work and wages spike. This means less money than anticipated is sent back to home to dependants in rural areas.
Inflation then filters through to the countryside as the affect of the rand's slide and other factors make themselves felt in rising food and fuel costs.
Discontent is simmering on the platinum belt and there is real threat of a repeat of the 2012 mining unrest which killed over 50 people, cost gold and platinum producers billions of dollars in lost revenue and led to sovereign credit downgrades.
Worryingly, there are signs the wildcat strike action that has rocked the mines could spread to other industries such as automobile manufacturing, a rare bright spot.
South Africa's main auto union last week threatened to "halt production" at a Volkswagen factory to protest against the dismissal of it members, days after the end of an illegal walkout at a Mercedes Benz plant.
Data on Tuesday showed car making was the only part of manufacturing that grew in the first quarter. Overall the sector declined by almost eight percent and economic growth braked to 0.9 percent in the quarter from 2.1 percent in Q4 last year.
Wage pressures are also costing jobs in a country with an unemployment rate of over 25 percent. In the third quarter of last year alone, 15,000 jobs were shed in the mining sector.
With the falling rand fanning inflation, growth slowing and the economy shedding jobs, stagflation - or something that looks a lot like it - is a very real prospect.
Complicating matters is politics, as attempts by mining companies to cut jobs to stay profitable have met with intense resistance from the ANC-led government.
World No. 1 platinum producer Anglo American Platinum has been forced to scale back from plans to cut up to 14,000 jobs in a bid to return to profit.
But if it continues to post losses, jobs will eventually have to go, one way or the other. If this inflamed social tensions, investors would flee again and spark another rand sell-off, setting in motion a familiar dizzying cycle.