Take home pay growth still weak despite first rise since February

• Annual rate of growth in take home pay increases to 3.3 per cent in June, according to VocaLink
• Industry sector index increases to 4.8%
• Interest rate increase likely due to persistent above target inflation

4 July 2007: The VocaLink take home pay index  shows that growth in take home pay has risen to 3.3 per cent in June from 3.0 per cent in May. This is the reversal of a trend which has seen a continued fall in the index since February 2007. Follow this link to read the full press release.

Key findings of the report

Annual growth in take home pay rose to 3.3 per cent in June from 3.0 per cent May. This figure confirms a continuing lack of upward pressure on wages. So far in 2007 the VocaLink take home pay index has averaged 3.5 per cent, down from an average of 4.1 per cent in 2006. The rise in the VocaLink take home pay index was driven by the manufacturing sector.  The annual rate of growth in the manufacturing sub-index accelerated to 4.8 per cent in June from 3.4 per cent in May. One explanation for this trend is the effect of redundancy payments. These payments are not made on a regular basis and may have contributed to the volatility that has been observed within the sub-index this year.

The annual growth of the service sector sub-index declined for the fourth consecutive month, falling from 2.5 per cent in May to 2.1 per cent in June. There has been a substantial decline from the growth rate of 4.9 per cent in February confirming that the strong pay increases widely expected in the January pay settlement round have failed to materialise.

Despite the modest rates of pay growth in the first half of 2007, upside inflationary pressures from persistently high commodity prices and debt fuelled consumer-spending make an interest rate increase in July to 5.75 per cent almost certain.

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 expanded by 0.7 per cent in the first quarter of 2007 according to figures released by the Office for National Statistics. Economic output is 3.0 per cent higher than twelve months before, revised up slightly from the previous estimate of 2.9 per cent. The continued strength in the economy is likely to boost inflation and wage demands. Economic growth was driven by the service sector where output increased by 0.8 per cent in the first quarter of 2007. Manufacturing output declined by 0.3 per cent over the same period, but remains 1.4 per cent higher than twelve months before.
• The Average Earnings Index figures for April from the Office for National Statistics have followed the trend identified two months previously by the VocaLink take home pay index. The annual growth rate of the Average Earnings Index including bonuses fell sharply from 4.9 per cent in March to 4.2 per cent in April. The two significant movements in the Index during 2007 have been the leap in the growth rate of wages in February and the rapid decline in April. Both movements have been accurately identified by the VocaLink take home pay index in advance.
  The driver behind these moves has been bonus payments, with growth in the Average Earnings Index excluding bonuses remaining relatively stable. The latest figures show that the annual growth in this Index eased slightly declining to 3.7 per cent in April from 3.8 per cent in March. Therefore, the large movements in the growth rate of the Index including bonuses in February and April were driven by the relative differences in bonuses between 2006 and 2007. The VocaLink take home pay index suggests that wage growth has remained subdued, with the annual growth rate rising from 3.0 per cent in May to 3.3 per cent in June.
• In other labour market data, the claimant count for unemployment benefits fell for the eighth consecutive month to 880,000 in May from 890,000 in April. This is the lowest level since September 2005. Traditionally, low unemployment would exert upward pressure on wages due to a reduction in the competition for jobs which improves worker bargaining power. However this factor conflicts with the impact of an increasing supply of labour, and falling levels of collective bargaining; both of which are acting to keep wage inflation under control.
• Industrial wage growth registered its sixth consecutive decline.  Annual growth in the Average Earnings Index for manufacturing firms fell to 3.3 per cent in April from a revised 3.5 per cent in March. The growth rate of wages has declined from 5.3 per cent in September 2006. The VocaLink industry sub-index has also remained subdued in the first few months of 2007; however it has registered a sharp increase since, rising to 4.8 per cent in June from 3.4 per cent in May.
• Annual growth in the service sector Average Earnings Index declined sharply from 4.7 per cent in March to 4.2 per cent in April. The VocaLink services sub-index predicted the decline in the Office for National statistics figures, and has continued to fall. Annual growth fell from 2.5 per cent in May to 2.1 per cent in June. This is the fourth consecutive monthly decline with the Average Earnings Index falling from 4.9 per cent in February. The pattern not only confirms that substantial pay awards widely expected from the January pay round have not materialised, but that the pay growth in the service sector has subsequently declined. Specific drivers of this trend are the lower propensity for collective bargaining in service industries and the increasing levels of competition firms face from abroad forcing them to minimise labour costs. The latter has been a feature of the manufacturing sector for some time, but with improvements in technology, service sector firms such as call centres are increasingly exposed to foreign competition.
• Consumer Price Inflation continued to moderate with the annual growth in prices declining to 2.5 per cent in May from 2.8 per cent in April. This is the second significant fall in the rate of inflation since it reached the high of 3.1 per cent in March. However, statements from the Bank of England highlight their inflationary concerns into the medium term. Despite the moderate levels of wage inflation demonstrated by the VocaLink take home pay index, persistently high commodity prices and record levels of consumer borrowing add to upside risks to prices over the second half of 2007. Annual growth in the Retail Price Index, which is more commonly used in wage negotiations, as it includes the cost of housing, fell to 4.3 per cent in May from 4.5 per cent in April.
• The latest retail sales figures released by the Office for National Statistics reveals that sales values were flat, showing no growth in May from April. However the retail trend remains robust, with sales values 4.5 per cent higher than one year ago.
• The Bank of England is set to increase the cost of borrowing to 5.75 per cent in July from 5.5 per cent in June. Monetary Policy Committee minutes reveal that this increase was almost made in June with the decision to hold rates carried by the narrowest possible majority of five to four. We forecast that interest rates will rise to 6.0 per cent by the end of 2007 with upward pressure on prices set to continue due to the persistently high prices of oil and other commodities and recent increases in the price of food.
• Figures released by the Nationwide Building Society showed house price growth exceeded expectations, rising by 1.1 per cent in June. Other data on the housing market was mixed, with the May mortgage lending figures falling to their lowest level since February 2006, whilst mortgage approvals rose to 114,000 in May from 109,000 in April. Expectations had been of a decline of 4,000. The VocaLink take home pay index has remained below the level of RPI inflation since September 2006. This fall in household spending power continues to be negated by consumers borrowing and spending on the back of rising house prices.