* Protests, strikes not seen scaring investors, markets
* Part of wage negotiation season
* Broader economic policy seen intact
* Discontent of poor needs to be watched
By Gordon Bell
JOHANNESBURG, July 28 (Reuters) - Striking council workers have trashed South African city streets, grabbing headlines worldwide, yet for financial markets in Africa’s biggest economy it is just the latest in a long line of popular protests.
Emboldened by their pick, Jacob Zuma, taking over as president in May, unions are testing their power, demanding above inflation wage increases and stretching the ability of companies and the state finances to fight the recession.
Over a 100,000 council workers were on strike for a second day on Tuesday, following violent clashes last week between police and thousands of poor township dwellers demanding improved basic services like water and electricity.
The regular face-off, however, of itself is nothing unusual.
Ever since the introduction of new labour laws in the mid-1990s, workers have used the right to strike to pressure companies in talks traditionally held in July and August. In 2006, council workers stayed away from work for three weeks, protesting daily, before reaching a three-year wage agreement.
The difference this time is a global downturn that has plunged South Africa into its first recession, while prices of food and other staple goods continue to record double-digit percentage rises.
That’s something that financial markets have been aware of for some time, though, and while the protests were erupting last week, the rand surged to an 11-month high against the dollar, extending gains for the year to more than 20 percent.
Led by a recovery of appetite for riskier emerging markets, Johannesburg stocks hit their highest since early October.
"The current take of the market is that these are issues that need to be watched closely but they do not fundamentally change the way investors look at South Africa," said David Hauner, analyst at Bank of America Securities-Merrill Lynch.
"Overall the market has been relaxed and this will stay the case unless there is a significant change in the broader picture."
The other unusual element to the strikes is that they come just months after Zuma’s election.
If protests drag on for weeks, they may start to question the president’s authority to pursue prudent policies in the crisis and resist pressure to deliver on expansive election promises.
On Tuesday protesting garbage collectors, bus drivers and licensing officers overturned rubbish bins and prompted police to fire rubber bullets to disperse unruly protesters. Paper and chemical workers also went on strike last week.
But gold and coal miners agreed to an improved salary raise offer and there are hopes unions will accept an improved offer when they come back to table with councils on Thursday.
Traders say market sentiment would only change should the strike continued for several weeks, or became national and blocked important roads and railways, affecting businesses. Either way it would slowly take a toll and the high wage awards do point to the troubles the economy faces.
"The strike action is clearly draining the economy," said Colen Garrow, economist with Brait in Johannesburg.
"Meeting aggressive wage demands ... does mean that you’ve got to recover the money somewhere. I don’t think we should be too surprised if in the national budget next year we (see) hikes in taxation."
Unions’ confidence has been buoyed by a decade of growth for the economy stretching back to 1998, but that has now turned sour and it is not clear how well South Africa will emerge from its first recession in almost two decades.
An expanded definition of joblessness, which includes people who have given up looking for work, jumped to 32.5 percent at the end of June.
Inflation also hit a high of almost 14 percent last year suggesting workers have some justification in demanding double-digit wage demands that the state budget can ill afford.
"Industrial strikes are a part of any free labour relations system. If you have the kind of economic conditions we have at the moment, it is going to last some time," political analyst Steven Friedman said.
But despite the anger in poor areas, Zuma’s position seems secure, with most of the demonstrators blaming petty council politics and incompetent officials for bad housing, water and other services, and unemployment.
The recession has limited the government and companies’ space to meet union demands for wages, although where agreement has been reached so far, workers have accepted increases not too far from inflation.
That may prove hard to sustain if, as many expect, emerging markets find it hard to get back to previous high growth rates after the global downturn eases. Some political analysts also say this year’s violence may just be a taste of what is to come.
"In the long term, this is not sustainable. In 5, 10 years time, this is going to become a national insurrection," said Ebrahim Fakir, political analyst at the Electoral Institute of South Africa.
"Even if it remains isolated for now, it may grow in intensity and for the market and for society as a whole, this is a major threat." (Editing by Patrick Graham)