VocaLink take home pay index – monthly report – November 2007

5 November 2007 – The VocaLink take home pay index reveals a slight increase of 0.3% in the level of take home pay in October.  While not enough to lift persistent weak pay growth for the year, it is an improvement after September saw the biggest month on month drop since May. Follow this link to read the full press release.

Key findings of the report
The annual pace of growth of the VocaLink take home pay index increased in October to 3.4 per cent from 3.1 per cent in September. This modest increase in wage growth fails to lift the persistently weak levels of pay growth in 2007. This year the annual growth rate of take home pay has only exceeded 4.0 per cent in a single month. In October 2006 seven of the previous ten months had achieved growth above this level.

Growth in the VocaLink services sub-index rose to 3.7 per cent in October from 3.1 per cent in September.  This is the strongest figure for six months, although the index remains well below the recent peak of 4.9 per cent in February. Nevertheless, the increase in October supports recent economic data which suggests that so far the credit crunch has not affected financial and services firms as severely as expected.

Growth in the VocaLink industry sub-index was unchanged in October from September, remaining at the six month low of 3.0 per cent. Office for National statistics data for the third quarter of 2007 show that the manufacturing sector struggled, with output expanding by just 0.2 per cent from the previous quarter and just 0.6 per cent year-on-year. Over this period the VocaLink industry sub-index has declined by over one third, from 4.8 per cent in June to 3.0 per cent in September and October.

The VocaLink take home pay index series
Three month average annual change
 

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 latest data from the Office for National Statistics shows that the UK economy expanded by 0.8 per cent in the third quarter of 2007. This far surpassed expectations of a 0.5 per cent expansion, and took annual growth to 3.3 per cent, from 3.1 per cent in the second quarter. The economy shrugged off the short run impacts of the credit crunch, with the finance and business services sector expanding by 1.7 per cent in the third quarter, and 5.6 per cent year-on-year. Overall the service sector performed strongly with output growth of 1.0 per cent in the third quarter and 4.0 per cent year-on-year. Output in the manufacturing sector expanded by a more modest 0.2 per cent, taking annual growth to 0.6 per cent.
• The latest figures reveal that annual growth in the Office for National Statistics’ average earnings index including bonuses increased to 4.0 per cent in August from 3.7 per cent in July. Excluding bonuses average earnings growth rose to 3.9 per cent in August from 3.7 per cent in July. The VocaLink take home pay index declined from 3.6 per cent in August to 3.1 per cent in September, before rising to 3.4 per cent in October, however it is believed that this increase will not be sustained. The weak growth in take home pay suggests that employers are successfully restraining pay negotiations, perhaps assisted by confidence in the Bank of England to maintain inflation close to the 2.0 per cent target.
• Consumer price inflation remained under the Bank of England’s target for the third consecutive month, it was unchanged at 1.8 per cent in September from August. This figure was helped by 2.7 per cent fall in the cost of transport in September from August and the declining cost of clothing and recreational activities. The VocaLink take home pay index has shown that weak wage growth during 2007 has contributed to lower levels of inflation by limiting the prices that the market will allow. However, price inflation in food and hospitality remains strong, tuition fees have risen by 13.9 per cent over the last twelve months and the recent record oil prices will put upward pressure on transportation costs. The Retail Price Index, which incorporates housing costs is commonly used in wage negotiations. Despite edging down to 3.9 per cent in September from 4.1 per cent in August, the Retail Price Index has not mirrored the sharp declines that have occurred in the consumer price index.
• Annual growth in the Office for National Statistics service sector average earnings index rose from 3.5 per cent in July to 3.9 per cent in August. Growth in the manufacturing sector average earnings index fell back from 4.2 per cent in July to 3.6 per cent in August. The VocaLink indices show that manufacturing wages are likely to weaken further. The VocaLink manufacturing index declined from 4.0 per cent in August to 3.0 per cent in September and October which reflects the weaker performance of the sector over the third quarter. The VocaLink services index declined from 3.3 per cent in August to 3.1 per cent in September, before rising to 3.7 per cent in October. Service sector wages are now growing at a quicker pace than in the three months from June. It is likely that wages in the service sector were affected by the poor summer weather and weaker tourism sector.
• The claimant count for unemployment benefits has declined for twelve consecutive months, reaching 835,800 in September from 956,700 one year previously. However this continued tightening of the labour market has failed to feed into upward pressure on wages. This may be due to the ability of the UK economy to attract workers from the EU to meet labour shortfalls.
• Members of the Bank of England’s Monetary Policy Committee voted eight to one to keep interest rates unchanged in October. The one dissenting member voted for a quarter point cut to pre-empt and soften the impact of a economic slowdown. Overall the Bank chose to continue its ‘wait and see’ policy despite the recent easing of inflation which has given it potential room to cut rates. Members cited the desire not to signal problems in the economy with hasty cuts, and only limited evidence of an economic slowdown. We expect the Bank of England to continue its prudent policy and leave rates unchanged in November.
• The latest figures released by the Office for National Statistics show that annual growth in the value of retail sales rose from a downwardly revised 3.4 per cent in August to 3.8 per cent in September. There is a large discrepancy in the volume and value of retail spending. Annual growth in the former stood at 6.2 per cent in September. The difference demonstrates the extent to which the price paid by consumers for retail goods and services has declined.
• Figures released by the Nationwide Building Society showed a surprise acceleration in the housing market. The average price of a house increased by a brisk 1.1 per cent in October, taking annual growth to 9.7 per cent, from 9.0 per cent in September. However the outlook for this market remains weak, with advance indicators showing a substantial fall in activity. The latest Bank of England figures show that mortgage approvals slowed to 102,000 in September, well below the average of 112,000 over the past three months and the lowest level since July 2005.