Voca take home pay remains strong

• Annual rate of growth in take home pay eased to 3.7 per cent, according to Voca
• Acceleration between the fourth quarter of 2006 and first quarter of 2007

3 April 2007 - The Voca take home pay index  shows that growth in take home pay eased to 3.7 per cent in March compared to 4.2 per cent in February.

Key findings of the report

• The annual rate of growth in take home pay in March eased to 3.7 per cent from 4.2 per cent in February. Growth in the Voca take home pay index remains relatively strong, and the figures show a noticeable acceleration between the fourth quarter of 2006 and the first quarter of 2007.
• The annual growth in take home pay in the service sector continues to be strong, despite the rate in the services sub-index falling from 4.9 per cent in February to 4.3 per cent in March. The growth of the industry sub-index also declined from 3.1 per cent in February to 2.7 per cent in March.
• Take home pay growth is useful for predicting trends in retail sales (see Figure 5). Retail sales have proven volatile recently. Their largest monthly decline in four years was reported in January, followed in February by the largest monthly increase in two years. We anticipated that the take home pay index would fall back in March from February, correcting for the sharp rise in take home pay growth which reached 4.2 per cent.
• Despite the easing of the Voca take home pay index this month, the acid test for assessing the impact of the January to April wage round will be next month’s results, with many negotiated pay settlements implemented in the new financial year.  A strong figure for next month’s take home pay growth in April could point to high wage inflation that may persist over the following year.

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

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

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) 
Figure 6: Voca take home pay index against retail price index

Economic commentary from cebr

• Recent revisions to Gross Domestic Product estimates released by the Office for National Statistics show the UK economy expanded by 0.7 per cent in the fourth quarter of 2006, rather than the previously published figure of 0.8 per cent. Despite this the average growth rate for 2006 rose from 2.7 per cent to 2.8 per cent due to upward revisions to the previous quarters of 2006 and downward revisions to 2005 figures. Output in productive industries fell by 0.2 per cent in the quarter whilst that of the service sector rose by 0.9 per cent.
• The latest Average Earnings Index figures from the Office for National Statistics show year on year earnings growth excluding bonuses fell to 3.7 per cent in January from the December figure of 3.9 per cent. Earnings growth including bonuses rose to 4.4 per cent in January from 4.2 per cent in December, growing at the fastest rate for six months. Other labour market data points to continued tightening with the claimant count for unemployment benefits falling for the fifth month in succession. This is likely to exert upward pressure on wages.
• The Voca manufacturing sub-index shows growth in take home pay easing from 3.1 per cent in February to 2.7 per cent in March. The decline in the Voca industry index experienced between October and January is now being mirrored by official earnings data which lags two months behind. Growth in the Average Earnings Index for manufacturing fell from 5.2 per cent in October to 3.9 per cent in January; the Voca manufacturing sub-index fell from 4.2 per cent to 1.5 per cent over this period.
• The Voca services sub-index eased from 4.9 per cent in February to 4.3 per cent in March. Between October and January the Voca services sub-index rose from 2.6 per cent to 4.6 per cent whilst the service sector Average Earnings Index rose from 4.1 per cent in October to 4.5 per cent in January. The comparisons of both services and manufacturing indices show correlation between Voca and AEI figures, although the former exhibits far greater volatility. This may be attributable to the differing frames of reference used in collection of the earnings data — with the Voca indices measuring what is actually paid into employees’ bank accounts by a sample of public companies and the AEI indices being based upon survey data of employees and employers.
• The annual rate of consumer price inflation also rose above the Bank of England’s central forecast by increasing to 2.8 per cent in February from 2.7 per cent in January. The Bank had projected a steady and rapid decline of inflation back to the 2.0 per cent target level by mid-2007. Retail price inflation figures, which are more commonly used in wage negotiations, as they include housing costs, rose from 4.2 per cent in January to 4.6 per cent in February, the highest level since 1991. The recent above target levels of inflation are leading to higher price expectations and putting upward pressure on wage negotiations. However the rate of inflation is likely to fall in coming months as crude oil prices – currently at around $68-a-barrel – have a strong negative impact having retreated from their peak prices of almost $80 last summer. 
• Data released by the Office of National Statistics last week shows that retail spending in the UK bounced back in February. The volume of sales suffered their largest monthly decline in four years in January falling by 1.8 per cent, but in February sales expanded by 1.4 per cent, reversing most of the decline. The overall volume of retail sales is now 3.3 per cent higher than 12 months ago reflecting the rebound in the February take home pay figures. We expect that March retail sales figures will not be as strong given the fall back in the latest Voca take home pay figures.
• The housing market has begun to exhibit signs of weakening in 2007. Figures collected by Nationwide show the annual rate of house price growth fall from 10.2 per cent in February to 9.3 per cent in March. Whilst this figure remains high; significantly the monthly increases when adjusted for seasonal factors have been very weak between January and March, with prices growing by an average of just 0.4 per cent per month. The strength of the housing market has given consumers the confidence to borrow money and spend, if it weakens during 2007 consumers are likely to tighten their belts.
• The Bank of England decided to keep interest rates on hold in March at 5.25 per cent. The minutes from the Monetary Policy Committee meeting reveal that the decision was carried by eight votes to one. Surprisingly the dissenting member, David Blanchflower voted to cut interest rates by 25 basis points, citing “considerable spare capacity in the labour market” and “benign” prospects for wage inflation. Whilst the committee was confident inflation would fall in the short-run they raised concerns over medium term prospects due to the slight depreciation of sterling and strong growth in the money supply. Despite David Blanchflower’s opinion we consider one further rate rise likely in the current cycle, particularly given the underlying wage inflation risks through the pay settlement round. The increase is highly likely to come in April or May. The March inflation figure, which the Monetary Policy Committee has access to in its April deliberations, is likely to be crucial in deciding the outcome.