VocaLink take home pay index

• Take home pay growth remains below the Retail Price Index, according to VocaLink
• Annual rate of growth in take home pay increases slightly to 3.6 per cent in July
• Services sector index increases to 2.9 per cent

1 August 2007 – The VocaLink take home pay index shows that growth in take home pay has risen to 3.6 per cent in July from 3.3 per cent in June. Despite this second consecutive rise, wage growth has remained below the increase in the Retail Price Index for the previous nine months. Follow this link to read the full press release.

Key findings of the report
The annual pace of growth of the VocaLink take home pay index rose from 3.3 per cent in June to 3.6 per cent in July. This is the second consecutive rise; however, wage growth has remained below the level of retail price inflation for the previous nine months.

Annual growth in the volume of retail sales has declined for four consecutive months, from 5.1 per cent in February to 3.4 per cent in June. This trend mirrors the recent decline in the growth rate of earnings and it is likely that low growth in take home pay and rising interest rates are impacting the retail sector.

Growth in the services sub-index increased from 2.1 per cent in June to 2.9 per cent in July. However, the take home pay index shows that service sector pay growth has been slowing in 2007, with annual pay growth falling from 4.6 per cent in January. Growth in the Office for National Statistics Service Sector Average Earnings Index has mirrored this trend falling from 5.0 per cent in February to 3.4 per cent in May.

Growth in the VocaLink manufacturing sub-index eased from the nine month high of 4.8 per cent in June to 4.5 per cent in July. Data suggests that the manufacturing sector in the UK is performing above expectations, with output expanding by 0.6 per cent in the second quarter of 2007, up from a decline of 0.3 per cent in the first quarter. UK Manufacturers have so far performed well despite the strength of the pound, due to strong demand domestically and from the euro-zone plus an upturn in the inventory cycle.

The VocaLink take home pay index series
Three month average annual change (percent increase)



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



Figure 2: VocaLink industry and services indices
 


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


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



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


 
Figure 6: VocaLink take home pay index against retail price index


 
Economic commentary from cebr

• The UK economy exceeded expectations by expanding by 0.8 per cent in the second quarter of 2007 according to figures released by the Office for National Statistics. Economic output is 3.0 per cent greater than one year ago. Growth in the service sector remains strong, with output expanding by 0.8 per cent, the same growth rate as in the first quarter of 2007. The manufacturing sector also performed well, with output growing by 0.6 per cent in the second quarter of 2007. This is up from the 0.3 per cent decline registered in the first quarter.
• Growth in the Office for National Statistics Average Earnings Index for May continued to follow the downward trend identified three months previously by the VocaLink take home pay index. The annual growth rate of the Average Earnings Index including bonuses declined from a revised 4.3 per cent in April to 3.6 per cent in May. This is the second consecutive sharp decline in the annual growth rate of the Average Earnings Index, which stood at 4.9 per cent in March. This is the sharpest two month decline since May 2000.
• Growth in the Average Earnings Index excluding bonuses registered a smaller decline from 3.7 per cent in April to 3.6 per cent in May. This demonstrates that the sharp decline in growth of the Average Earnings Index including bonuses has been driven by bonus payments rather than basic salaries. The latest figures from the VocaLink take home pay index indicate that wage growth has remained relatively low, with annual growth in the index at a modest 3.3 per cent in June, rising to 3.6 per cent in July.
• Annual growth in the Office for National Statistics Service Sector Average Earnings Index declined from 4.2 per cent in April to 3.4 per cent in May. The rapid decline in the headline Average Earnings Index since March has been driven entirely by the service sector, with growth in manufacturing wages actually rising over the period. The downward trend in service wage growth was identified by the VocaLink figures, with growth in the VocaLink services sub-index declining from 4.3 per cent in March to 2.5 per cent in May. This sub-index has since fallen to a record low of 2.1 per cent in June, before rising to 2.9 per cent in July. In the long term service sector pay growth is restrained by low levels of union membership and improvements in technology, such as the internet which is increasing the ability of foreign firms to compete. The recent decline in the growth rate has also been brought about by modest rises in bonus payments from twelve months ago.
• Growth in the Manufacturing Sector Average Earnings Index rose from 3.3 per cent in April to 3.7 per cent in May. Growth in the VocaLink manufacturing sub-index rose from 2.7 per cent in March to 3.4 per cent in May. The latest VocaLink figures show strong wage growth in the manufacturing sector with the take home pay index rising to a nine month high of 4.8 per cent in June, and then moderating slightly to 4.5 per cent in July.
• In other labour market news the claimant count for unemployment benefits fell for the ninth consecutive month from 880,000 in May to 864,100 in June.
• Consumer Price Inflation fell to 2.4 per cent in June from 2.5 per cent in May. However, inflation remains above target and upward pressure is likely to persist into the medium term as the rising prices of oil, food and other commodities continue to be passed onto consumers. Annual growth in the Retail Price Index, which is more commonly used in wage negotiations, as it includes the cost of housing, nudged up to 4.4 per cent in June from 4.3 per cent in May.
• The Bank of England acted as expected by increasing the cost of borrowing to 5.75 per cent in July from 5.5 per cent in June. We forecast that interest rates will rise to 6.0 per cent by the end of 2007 due to persistent inflationary pressure, although the Bank of England is likely to wait for at least another month to allow more data on the strength of the economy to become available.
• The latest retail sales figures released by the Office for National Statistics reveal that annual growth in sales volumes fell from 3.9 per cent in May to 3.4 per cent in June. This is the fourth consecutive monthly decline since February, when the growth rate stood at 5.1 per cent. It is likely that the extreme weather conditions in July will have had an impact on retail, this will certainly have been a factor in this declining trend.
• Figures released by the Nationwide Building Society showed house price growth stalled in July, rising by just 0.1 per cent from June. Nevertheless, the annual rate of growth remains a robust 10.0 per cent.
• World stock markets have suffered substantial losses over the past two weeks on the back of concerns over rising credit costs and the knock on effects on merger and acquisition activity and the profits of highly leveraged firms. However, recent economic data points to continued high profit levels and economic strength, with GDP growth in the second quarter of 2007 exceeding expectations in both the US and UK.