Consumer spending squeezed by declining wage growth

• Annual rate of growth in take home pay fell to 3.0 per cent in May, according to Voca
• Cost of living continues to outstrip wages
• Lowest rate of growth since December 2006

6 June 2007: The Voca take home pay index  shows that growth in take home pay fell further to 3.0 per cent in May from 3.6 per cent in April. This is the lowest rate of growth since December 2006 and indicates that wage inflation remains subdued. Follow this link to read the full press release.

Key findings of the report 
Annual growth in take home pay eased to 3.0 per cent in May from 3.6 per cent in April. This is the

• lowest rate of growth since December 2006 and indicates that wage inflation remains subdued. 
• The fall in the Voca take home pay index was driven by the service sector.  The annual rate of growth in the services sub-index registered a substantial decline from 3.6 per cent in April to 2.5 per cent in May. The industry sub-index was unchanged in May from April at 3.4 per cent.
• The cost of living continues to grow more quickly than wages. Retail Price Index inflation was 4.5 per cent in April, whilst the Voca take home pay index grew by 3.6 per cent. Inflation has now outstripped take home pay growth for eight months (see Figure 6). Given this trend, households are increasingly reliant on growth in the value of assets, such as houses, to support spending habits.
• There are signs that the housing market is beginning to weaken due to pressure from rising interest rates and weak wage growth. Nationwide figures show relatively modest price growth in the first five months of 2007, the strength of the year on year figures is largely on account of a spurt of growth in the latter half of 2006.

The Voca take home pay index series
Three month average annual change (percent 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 latest figures released by the Office for National Statistics show the UK economy expanded by 0.7 per cent in the first quarter of 2007. Gross Domestic Product was 2.9 per cent higher than in the first quarter of 2006, revised up from 2.8 per cent in the initial estimate. The service sector performed strongly, with output expanding by 0.8 per cent in the quarter however manufacturing output declined by 0.3 per cent.
• The latest Average Earnings Index figures from the Office for National Statistics show annual growth, excluding bonuses, edged up to 3.8 per cent in March from 3.7 per cent in February. The annual growth rate of the Average Earnings Index including bonuses eased to 4.9 per cent in March from 5.0 per cent in February. The Average Earnings Index has increased since December when it was 4.2 per cent. This has been driven by higher bonus payments, with the trend not mirrored in the figures excluding bonuses. The Voca take home pay index suggests that this effect should be temporary, with the figures likely to ease in coming months. However, the claimant count for unemployment benefits in April fell for the seventh consecutive month to 890,000 from 905,700 in March. There are now 70,000 fewer claimants than in September 2006 which should exert upward pressure on wages.
• Manufacturing wage growth continues to weaken with the Average Earnings Index annual growth dropping to 3.4 per cent in March from 3.6 per cent in February. Between September 2006 and March 2007 growth in the manufacturing Average Earnings Index has declined from 5.3 per cent to 3.4 per cent.  During the same period the growth rate of the Voca industry sub-index has declined from 5.2 per cent to 2.7 per cent. The Voca industry sub-index currently stands at 3.4 per cent. The data reflects the continued difficulties faced by UK industry from the strength of the pound damaging competitiveness and foreign firms with lower costs.
• Pressure on wage inflation is largely originating in the services sector with annual growth in the Average Earnings Index for services running at 4.8 per cent in March, although easing slightly from 5.0 per cent in February. The Voca services sub-index in this period fell from 4.9 per cent in February to 4.3 per cent in March. It has since declined to 2.5 per cent in May. 
• Consumer Price Inflation returned to within the Bank of England’s tolerance zone after declining to 2.8 per cent in April from 3.1 per cent in March. This fall was driven by cuts in gas and electricity prices and financial service fees such as foreign exchange commission and overdraft fees. Annual growth in the Retail Price Index, which is more commonly used in wage negotiations, as it includes the cost of housing, fell to 4.5 per cent in April from 4.8 per cent in March. 
• The latest retail sales figures released by the Office for National Statistics were weaker than expected. Between March and April both the volume and value of retail sales declined by 0.1 per cent. However retail is highly volatile when analysed on a monthly basis and the trend remains robust, with the value of sales 5.4 per cent higher than one year ago. With high inflation and modest wage growth restraining consumers’ buying power, this retail growth continues to be financed by borrowing. The latest Bank of England figures show that net lending to individuals rose by £9.4 billion in April, taking the total amount outstanding to £1.3 trillion.
• House price figures released by Nationwide suggest that rising interest rates and slack take home pay growth may be beginning to cool in the market. Prices increased by a relatively modest 0.5 per cent in May from April. House prices are 10.3 per cent higher than one year ago but this is largely due to very strong price increases between July and December 2006 – rather than the performance in 2007. Furthermore, figures from the Bank of England show substantial falls in April for both mortgage approvals and loans for home purchase.  The latter is now at its lowest level for 12 months.  
• Following the increase of the base rate to 5.5 per cent in May, the Bank of England is likely to increase interest rates further to 5.75 per cent in the summer. The minutes from May’s Monetary Policy Committee meeting reveal that an unprecedented 0.5per cent increase in rates was considered by the committee members. Confidence was also expressed in the robustness of the economy to absorb further monetary tightening. Cebr believe there is an even chance that the Bank of England will increase interest rates to 6.0 per cent in the current cycle in order to bring inflation back to target.