Voca take home pay index shows third consecutive rise

• Annual growth in take home pay accelerates to 4.2 per cent, according to Voca
• Increase in manufacturing sector pay more than doubled

7 March 2007 - The Voca take home pay index  shows that growth in take home pay has risen to 4.2 per cent in February (January: 3.3 per cent). This upward trend continues on the back of salary increases negotiated in the current pay settlement round.

Key findings of the report

• In February the year-on-year growth in take home pay accelerated to 4.2 per cent from 3.3 per cent in January. The Voca take home pay index has rebounded from its all time low of 2.6 per cent in November 2006, recording strong growth in three consecutive months. The take home pay index shows that high pay increases in the January wage settlement round are now impacting average take home pay.   
• Service sector pay growth remained strong, with the services sub-index rising to 4.9 per cent in February, from 4.6 per cent in January. The driving force behind the acceleration in February take home pay growth was the manufacturing sector. The industry sub-index more than doubled from the all time low of 1.5 per cent in January to 3.1 per cent in February.
• Take home pay growth is useful for predicting trends in retail sales (see Figure 5). Consumer spending in the second half of 2006 proved resilient to the climate of rising interest rates and depressed real wage growth. However retail sales in January fell by 1.8 per cent from December. The largest decline in a single month for four years.
• The rising take home pay index points to high pay increases in the current wage settlement round. During the January to March period two thirds of workers will negotiate their salary increases. Persistent above target inflation is eroding the buying power of take home pay, which workers are seeking to compensate for in pay negotiations.

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

• Figures from the Office of National Statistics show that the UK economy expanded by 0.8 per cent in the fourth quarter of 2006. This takes year-on-year growth to 3.0 per cent – the highest level since the last quarter of 2004. The service sector grew by 1.0 per cent in the fourth quarter of 2006, up from the 0.8 per cent growth recorded in the previous quarter. In contrast, the production industries saw output decline by 0.2 per cent in the last quarter of 2006.
• The latest Average Earnings Index figures from the Office for National Statistics show year on year earnings growth excluding bonuses holding at 3.9 per cent in December. Earnings growth including bonuses eased to 4.1 per cent in December from 4.3 per cent in November.
• The retail price index hit a 15 year high of 4.4 per cent in December.  Early evidence suggests workers are using the current pay settlement round to push for above inflation pay increases to reverse the recent fall in buying power. Data collected by Incomes Data Services points to pay deals in January at their highest level for six years. This is supported by the Voca take home pay index which has risen by 1.3 per cent since December to 4.2 per cent in February. It appears that a sharp divergence between private and public sector wage growth will emerge in 2007, with Gordon Brown attempting to restrain public sector pay growth at 1.9 per cent.
• Recent data released by the British retail consortium demonstrates the strength of consumer spending in 2006. The volume of all retail sales increased by 5.2 per cent between January 2006 and January 2007. Like for like sales were up by 3.1 per cent over the year. However official data shows a sharp drop in retail performance following the buoyant Christmas period. Between December and January the volume of retail sales fell by 1.8 per cent, the largest decline in a single month for four years.
• The strength of the housing market supported consumer spending in 2006 with the Nationwide building society’s average price for a home rising by 10.4 per cent between December 2005 and December 2006. This has allowed home-owners to borrow and spend despite the three interest rate increases since August 2006, and low real income growth. The housing market is forecast to cool in 2007 and despite increasing this month the growth in the Voca index remains level with that of the Retail Price Index. This means that the spending power of individuals take home pay is not increasing; consequently the retail sector is likely to experience a far more challenging year than in  2006.
• The Voca manufacturing sub-index shows growth in take home pay doubled between January and February from 1.5 per cent to 3.1 per cent. The rate of increase in manufacturing wages has been below Retail Price inflation since October; employees are using the pay settlement round in order to reverse the decline in the spending power of their salaries. However the UK manufacturing sector is likely to have a challenging 2007, facing pressure from the strong pound and world economic slowdown.  This could dampen export demand and competitiveness against imported goods. Furthermore, the inventory cycle that was supporting manufacturing through most of 2006, has peaked.  As a result firms will reduce output in 2007 and run down stocks.
• The Consumer Price Index fell to 2.7 per cent in January from 3.0 per cent in December. Inflation has remained above the Bank of England’s 2.0 per cent target since March 2006. The Bank’s latest inflation report forecasts inflation to tail off sharply, falling below 2.0 per cent before the end of 2007. However the prices of primary commodities have risen in recent weeks, with oil trading at over $62 per barrel. Should commodity prices remain high the Bank is likely to find inflation is more persistent than it expected. Cebr expect a further rate rise in March in order to help bring inflation down.