Take home pay growth hits two-year low

• Growth in take home pay halves in just four months, according to Voca
• Pay growth slackens dramatically in manufacturing sector
• Retail sales may suffer due to consumers’ squeezed wallets

5 December 2006 - The Voca take home pay index  shows that the growth in take home pay has fallen to 2.6 per cent in November from 3.3 per cent in October. This is the lowest level in the index’s two year history and represents a halving of pay growth since its peak in July. To read full press release please click here.

Key findings of the report

• The November Voca take home pay index fell to 2.6 per cent from 3.3 per cent in October. The annual growth rate of take home pay has halved in just four months from 5.2 per cent in July, with official earnings figures also beginning to mirror this trend. See Figure 1.
• The Voca industry index fell sharply to 2.7 per cent in November from 4.2 per cent in October. Growth in the Voca services index fell marginally to 2.5 per cent in November from 2.6 per cent in October. See Figure 2.
• Trends in the Voca take home pay index can prove a useful guide to the performance of the retail sector (see Figure 5). The latest figures show that the growth in take home pay is falling, at a time when households already face higher mortgage and credit card costs from rising interest rates. This points to a slowing of retail spending going into 2007.
• The latest Voca take home pay index shows growth in take home pay easing for the fourth consecutive month, indicating further slackening of the labour market. However, the next round of wage bargaining in December and January may see employees pressing for higher wages to counter falling disposable incomes.

The Voca take home pay index series
Three month average annual change (per cent change)


Results
Figure 1: Voca take home pay index against private sector Average Earnings Index (AEI)

Figure 2: Voca industry and services indices

Figure 3: Voca industry index against private sector AEI (manufacturing sector)

Figure 4: Voca services index against private sector AEI (service sector)

Figure 5: Voca take home pay index against retail sales index (all retailing)


Economic commentary from cebr

• The latest estimates for the growth of the UK economy show it expanded by a healthy 2.7 per cent between the third quarter of 2005 and the third quarter of 2006. This growth was driven by the strength of the service sector, where output has expanded by 3.4 per cent in the year. The strongest sub-sector is business and financial services where output is 5.2 per cent higher than one year before. However, household spending slowed significantly with third quarter growth falling to 0.4 per cent from 0.9 per cent in the second quarter. The Voca take home pay index shows that the rate of increase in take home pay halved in just four months to 2.6 per cent in November from 5.2 per cent in July. This squeeze in take home pay growth has forced households to tighten their belts.
• The latest government figures show that the annual growth rate of private sector earnings including bonuses, as measured by a three month moving average, fell to 4.0 per cent in September from 4.3 per cent in August. The official earnings growth figures are beginning to decline, as predicted by the Voca take home pay index. The primary reason for this is the 454,000 economically active individuals that have been added to the economy in the year to August. This has created slack in the labour market, reducing the upward pressure on wages. It has also contributed to the rise in unemployment.  The number of people claiming job-seekers allowance rose to 961,300 in October the highest since December 2001.
• Monthly retail sales volumes in the UK recovered from the 0.4 per cent decline in September to grow to 0.9 per cent in October. Retail sales volumes are now 4.0 per cent higher than in October 2005, boosted by the continuing strength of the housing market which gives consumers the confidence to spend. However, the impact of rising interest rates and the slowing of take home pay suggest that the strong retail performance of 2006 may not be repeated in 2007.
• The Voca take home pay index for the manufacturing sector fell sharply to 2.7 per cent in November from 4.2 per cent in October. There is concern that the recent buoyant performance will be suffocated by the strength of the pound, adverse inventory cycles and the world economic slowdown dampening international trade. Recent indicators such as the BDO manufacturing index show optimism dipping from 102.7 in October to 98.3 in November.   
• The annual growth of consumer prices for October was unchanged fromSeptember (2.4 per cent.). Despite the slowing world economy and falling growth in take home pay, inflation remains well above the 2.0 per cent target. The Bank of England’s own forecasts see inflation rising to almost 3.0 per cent as the high input prices in 2006 continue to filter through to wage negotiations and output prices. The key to the direction of interest rates in 2007 will be how quickly the US economy slows, and how buoyant the UK retail and housing markets remain.
• The pre-Budget report released tomorrow is expected to include plans to increase environmental taxes and curb public spending growth. This is likely to have a negative impact upon consumer confidence and spending, reinforcing trends highlighted in this month’s Voca take home pay index report.