Stronger take home pay growth gives bank ammunition for rate rise

• Growth in take home pay edges up to 3.3 per cent, according to Voca
• Latest round of pay negotiation pushes up pay growth in service sector
• However, manufacturing pay growth falls dramatically to all-time low

6 February 2007 - The Voca take home pay index  shows that growth in take home pay has increased to 3.3 per cent in January (December: 2.9 per cent). The index has been boosted in part by Christmas bonuses and increased use of temporary workers, and suggests that the latest round of pay negotiation may already be having an effect. To read the full press release click here.

Key findings of the report

• In January 2007 overall take home pay growth increased to 3.3 per cent from 2.9 per cent in December 2006. This is the second consecutive rise in the Voca take home pay index since its all-time low in November, boosted in part by Christmas bonuses and temporary workers but also suggesting that the January pay settlements may already be affecting levels of take home pay.
• The overall increase was driven by the service sector sub-index for take home pay which performed strongly, increasing to 4.6 per cent in January 2007 from 3.2 per cent in December 2006. The industry sub-index continued its retreat, falling to 1.5 per cent in January from 2.2 per cent in December. (See Figure 2).
• Historically there has been a strong correlation in the Voca take pay index and spending levels (see Figure 5). Consumer spending has so far seemed resilient against a climate of higher interest rates and rising inflation which has depressed real wage growth.
• Consumer confidence remains high, maintained by the buoyancy of the housing market in 2006. This month’s rise in take home pay will help to support consumer spending over the next few months. However, there are signs that the housing market has started to slow and if this continues consumer spending may begin to weaken.
• The upturn in take home pay growth suggests that wage increase demands have already started to materialise - giving the Bank of England ammunition to raise interest rates again this week in order to stamp out inflation.

The Voca take home pay index series
Three month average annual change (% 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

• The UK economy expanded 0.8 per cent between the third and fourth quarter of 2006 — the fastest quarterly expansion of the economy in two and a half years. Year-on-year growth rose to 3.0 per cent from 2.8 per cent annual growth in the previous quarter.
• Business surveys and retail sales data released over Christmas and New Year pointed to strong UK economic activity and pushed the Bank of England to raise rates in January to 5.25 per cent. With inflation far above the Bank of England’s 2.0 per cent target, and earnings growth relatively strong at present, it is likely that rates will rise again this quarter as the Bank of England maintains its inflation-fighting credibility.  If, as has been suggested, interest rates were to rise to 5.5 per cent, this would be the highest level since March 2001.
• Figures from the Office for National Statistics are in line with the latest Voca take home pay index data, with the Average Earnings Index (including bonuses) at 4.1 per cent in November from a revised 4.1 per cent in October.  Excluding bonuses, the AEI remained unchanged at 3.9 per cent in November. Generous bonus payments, alongside a buoyant housing market have so far helped to boost consumer spending; the strength of which has seemed resilient in the face of higher interest rates and rising inflation depressing real wage growth.
• Retail sales volume in the UK expanded by 1.1 per cent from November to December boosted by shopping in the run-up to Christmas. The level stands 4.7 per cent higher than one year before. However, the housing market is starting to show signs of slowing down and retail prices have risen faster than earnings over the last 12 months to December 2006. These factors are likely to dampen the growth in consumer spending this year.
• The struggle for manufacturers looks set to continue into 2007 under dual pressures of the strong pound and weakening export demand from abroad — particularly from Europe as their economies slow. This is evident in the decline of the Voca industry sub-index which fell to an all-time low of 1.5 per cent in January 2007 from 2.2 per cent in December 2006. However, the latest figure is particularly low as a result of unusually high levels of take home pay a year earlier in January 2006 — driven by redundancy payments in the sector. The January survey from the Chartered Institute of Purchasing Managers suggests that manufacturers are more optimistic.  The manufacturing business activity index edged up to 52.8 from a revised 52.0 in December, suggesting that the decline in the manufacturing index may only be temporary.
• The Consumer Price Index rose to 3.0 per cent in December from 2.7 per cent in November. Inflation has remained far above the Bank of England’s 2.0 per cent target since last March eroding spending power growth. The latest take home pay data suggests that wage increase demands have been made to counteract the high price of consumer goods.
• According to the minutes of the Monetary Policy Committee there was little evidence on the outcome of the January pay settlement round when the Bank of England made the decision to raise interest rates. The latest data from the Voca take home pay index suggests that wage increase demands have already started to materialise, giving the Bank of England ammunition to raise interest rates again this week in order to combat inflation.