Disposable income being squeezed, according to Voca

Take home pay index remains close to all-time low
Increase in Retail Price Index means less spending power for consumers
Tough conditions in manufacturing sector continue

5 January 2007 - The Voca take home pay index shows that UK disposable incomes are being squeezed by slackening pay growth against a background of rising inflation. Growth in take home pay remains near the index’s all-time low (2.6 per cent in November), at 2.9 per cent in December. Set alongside the considerable recent increase in inflation, as shown by the Retail Price Index, this points to a tough 2007 for consumers and retailers. To view the full press release please click here.

Key findings of the report

In December overall take home pay growth rose to 2.9 per cent from 2.6 per cent in November. The index has rebounded from the all-time low in November, boosted by Christmas bonuses.
The sub-index highlighting take home pay in the services sector performed strongly, increasing from 2.5 per cent in November to 3.2 per cent in December. The industry index continued to slide, reaching 2.2 per cent in December from 2.7 per cent in November. See Figure 2.
Overall trends in the Voca take home pay index can affect spending levels (see Figure 5). Retail sales performed strongly over the Christmas period; however lower growth in take home pay may force consumers to tighten their belts in 2007.
Comparisons between take home pay and the Retail Price Index show that the growth in employees’ spending power has declined in 2006. Retail price index inflation rose from 2.2 per cent in December 2005 to 3.9 per cent in November 2006, whilst growth in take home pay, as measured by the Voca index has fallen from 5.1 per cent in December 2005 to 2.9 per cent in December 2006. See Figure 6.

The Voca take home pay index series
Three month average annual change (percent increase)
Table of January 2007 take home pay index data

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

Figure 2: Voca industry and services indices
Graph of Voca industry and services indices

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

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

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

Our forecasts for UK economic growth show a robust expansion of 2.7 per cent in 2006. However, we take a more pessimistic view for growth in 2007 than Gordon Brown; with output expanding by 2.4 per cent compared to the treasury forecasts of between 2.75 and 3.25 per cent.
The Average Earnings Index including bonuses rose slightly to 4.2 per cent in October from 4.0 per cent in September. Despite the downward pressure on wages exerted by migrants entering the UK labour market, the official indices are currently maintaining their growth levels. However the recent high levels of inflation have slowed the growth in buying power of these earnings. Retail Price Index inflation which is commonly used in pay negotiations, rose to 3.9 per cent in November, leaving only a small margin for real wage growth.
Retail sales volumes in the UK expanded by 0.3 per cent from October to November. The level stands 3.2 per cent higher than one year before. Whilst official data for Christmas trading is not yet available, sales figures released by individual retailers suggest trading was strong. We forecast a weakening of retail sales into 2007 as low levels of real wage growth and a pause in the momentum of the housing market impact consumer confidence.
It is likely that 2007 will be a difficult year for manufacturers. The Voca industry index fell to 2.2 per cent in December, after commencing the year at 6.7 per cent. The December survey from the Chartered Institute of Purchasing Managers supports this downward trend with the manufacturing business activity index falling to 51.9. The index has fallen steadily since the high of 55.0 in June. Confidence in the service sector is strong; the corresponding business activity index for services rose to a nine year high of 60.6 in December.
The Consumer Price Index rose to 2.7 per cent in November from 2.5 per cent in October. Inflation has persisted above the Bank of England’s 2.0 per cent target since last March and it is likely that the current wage negotiations will reflect this deterioration of spending power growth. Recent official data on the labour market shows unemployment stabilising; the claimant count for job seekers allowance fell in November by 5,700, confounding expectations of a rise; if the labour market tightens in early 2007 there will be renewed pressure on the Bank for a rate rise in February to bring inflation back under control.
Gordon Brown tightened fiscal policy by £2 billion-a-year. In his Pre-Budget Report in December, he unveiled a doubling of air passenger duty on environmental grounds worth £1 billion, and a volley of anti-tax avoidance measures aimed at companies. However, the measures are unlikely to have any significant impact on the UK macro-economy.
Our forecasts for City bonus payments in the 2006/7 pay round suggest a record pay out of £8.8 billion; an increase of 18.3 per cent on the previous year. This has helped to drive the Voca services index to 3.2 per cent in December from 2.5 per cent in November.