VocaLink take home pay index – monthly report – December 2007

4 December 2007 – The VocaLink take home pay index reveals a decrease of 0.2% in the level of take home pay in November. The fall has been driven by the service sector which saw the sub-index decline from 3.7% in October to 3.3% in November.  This decline comes after last month saw an unexpected growth, the strongest for six months. Follow this link to read the full press release.

Key findings of the report
The annual growth rate of take home pay edged down last month, the VocaLink take home pay index falling from 3.4 per cent in October to 3.2 per cent in November. The growth of take home pay has been modest throughout 2007, averaging just 3.5 per cent. So far consumer spending has remained strong but signs of a weaker housing market and falling consumer confidence suggest that a slowdown may begin this Christmas period.

The fall in this month’s VocaLink take home pay index was driven by the service sector, which saw the sub-index decline from 3.7 per cent in October to 3.3 per cent in November. However there appears to have been no significant impact from the credit crunch on service sector wages. In June 2007 the VocaLink services index stood at 2.1 per cent and has risen, albeit erratically, even as the effects of the crunch have been felt.

Take home pay in the manufacturing sector continued its modest pace of growth. The VocaLink manufacturing index declined slightly from 3.0 per cent in October to 2.9 per cent in November, the lowest level since March. The continued rise of the pound against the dollar is making UK manufacturers less competitive against US and Chinese competitors, although the pound has weakened against the euro which should boost trade exports to the continent.

The VocaLink take home pay index series
Three month average annual change


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 Office for National Statistics downwardly revised its estimate of UK economic growth in the third quarter of 2007 to 0.7 per cent from the preliminary estimate of 0.8 per cent. This still represents a robust economic performance; at an annual growth rate of 3.2 per cent. The economy was driven by rising corporate profitability and strong growth in household consumption. The output of the service sector increased by 0.9 per cent in the third quarter, the same rate as in the second quarter. The finance and business services category performed strongly despite the credit crunch expanding by 1.5 per cent in the third quarter – although this is revised down from the previous estimate of 1.7 per cent. The manufacturing sector fared worse in the third quarter than previously thought. Output growth was revised down to 0 from the previous estimate of 0.2 per cent.
• The latest figures reveal that annual growth in the Office for National Statistics’ average earnings index including bonuses increased to 4.3 per cent in September from 4.0 per cent in August. Excluding bonuses, average earnings growth was unchanged in September from August at 3.8 per cent. The VocaLink take home pay index increased in-line with the average earnings index during the summer, but has since declined. This suggests that the recent rally in official earnings estimates is likely to be temporary.
• Consumer price inflation edged above the Bank of England’s target in October. Year on year price growth increased to 2.1 per cent in October from 1.8 per cent in September. The increase was driven by rising university tuition fees, food and transport prices. Inflationary pressure is being exerted by the high prices of world commodities such as oil and wheat, the increase on fuel duty also came into effect in October. The Retail Price Index, which incorporates housing costs and is commonly used in wage negotiations increased to 4.2 per cent in October from 3.9 per cent in September. 
• The latest Office for National Statistics estimates show that service sector wages registered a second consecutive strong month. Annual growth in the service sector average earnings index rose from 3.9 per cent in August to 4.3 per cent in September. Growth in the manufacturing sector average earnings index declined from 3.6 per cent in August to 3.0 per cent in September. This is the second consecutive sharp decline in manufacturing wage growth and follows the trend that was previously identified by the VocaLink manufacturing index. The VocaLink manufacturing index has declined from 4.5 per cent in July to 3.0 per cent in September, whilst the Office for National Statistics average earnings index declined from 4.2 per cent to 3.0 per cent over the same period. This reflects the weaker performance of the manufacturing sector over the third quarter. The VocaLink services index is currently tracking below the level of the Office for National Statistics estimates, suggesting leaner times in the run up to Christmas.
• Unemployment fell again in October, with the claimant count for unemployment benefits reaching 824,800, the lowest level since February 2005. October was the thirteenth consecutive month in which the claimant count has declined. This persistently low level of unemployment may be beginning to be reflected elsewhere in the labour market. Evidence of this is provided by the upturn in wage growth during the summer, however the VocaLink indices suggest that other factors like the slowing economy are acting to restrain wage growth.
• The Bank of England chose to continue its wait and see policy in the November Monetary Policy Committee meeting. Interest rates have been on hold since July, with the Bank of England so far resisting pressure for a cut in the wake of the sub-prime crisis and credit crunch.
• Retail sales volumes dipped by 0.1 per cent in October from September. The marginal fall was not sufficient to dent annual sales volumes which remain strong at 5.1 per cent. The retail sector has so far resisted predictions of a downturn although volumes have been boosted by retailers’ price discounts. The annual growth in the value of retail sales was a more subdued 3.7 per cent in October, and has fallen significantly during the summer having stood at 5.2 per cent in May. There are further signs of a poor Christmas for retailers this year.  Market research agency GfK, who conduct a monthly survey in conjunction with polling company NOP show that consumer confidence is at its lowest level since March 2003.
• The Nationwide figures for house price growth in November were the weakest since June 1995, with prices declining by 0.8 per cent. However it is important to highlight that the housing market is extremely volatile on a month by month basis, with the decline following a 1.1 per cent price increase in October from September. Nevertheless there is a definite downward trend in house prices, with year on year growth dipping to 6.9 per cent in November.