VocaLink take home pay index – monthly report – September 2007

• VocaLink take home pay index remains unchanged at 3.6 per cent in August

5 September 2007 – The VocaLink take home pay index in August shows no increase on July’s figure.  This, combined with the recent announcement that mortgage payments are taking a higher proportion of take home pay will have a negative impact on the housing market and consumer spending. 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 was 3.6 per cent in August – the same as in July. Despite falling unemployment, wage growth has been subdued in 2007 which has contributed to the declining rate of inflation as growth in wages affects consumer spending and costs of production. In July inflation fell to 1.9 per cent; this is the first time the measure has been below its 2.0 per cent target in fifteen months, and the fourth consecutive fall since the peak of 3.1 per cent in March.

Growth in the VocaLink services sub-index increased to 3.3 per cent in August from 2.9 per cent in July. However, growth in this index has weakened significantly during 2007 from 4.9 per cent in February, a trend which has been followed by data from the Office for National Statistics. The strong growth in service sector output experienced during 2007 has not been reflected in wages.
Growth in the VocaLink manufacturing sub-index declined to 4.0 per cent in August from 4.5 per cent in July. This is the second consecutive monthly fall in the index, which stood at 4.8 per cent in June. Average wages in UK manufacturing have performed better than the industry as a whole over the past year. It is likely that this is largely down to structural changes – with lower value jobs increasingly outsourced to countries that offer cheap labour.

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

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 0.8 per cent in the second quarter of 2007 according to figures released by the Office for National Statistics. This took the year-on-year level of growth to 3.0 per cent. Growth in the service sector remains strong, with output expanding by 0.8 per cent in the second quarter, the same rate as in the first quarter of 2007. The manufacturing sector also performed well, with output growing by 0.6 per cent in the second quarter, up from the 0.3 per cent decline registered in the first quarter. However, there are signs that growth in the economy is beginning to slow – a trend which may be exacerbated by the current financial market troubles.
• The latest figures reveal that annual growth in the Office for National Statistics average earnings index including bonuses declined to 3.4 per cent in June from 3.6 per cent in May, this is the lowest growth rate since January 2006. This measure of pay growth has fallen sharply during 2007 from the peak of 4.9 per cent in February. However the annual data masks the true extent of the slowdown in wage growth in 2007; average salaries have increased by a mere 0.3 per cent between January and June. Consequently the 3.4 per cent increase in wages between June 2006 and June 2007 occurred almost exclusively in the latter half of 2006. The data points to a lack of bargaining power amongst workers, who are struggling to push their wages up. This is due in large part to structural changes in the labour market. Fewer workers exercise collective bargaining through unions, more work in small companies and the average duration of employment has fallen. It is also likely that the general increase in competition across the corporate sector and increasing input costs from energy has forced companies to increase the pressure on their wage costs – which are usually the largest component of firm expenditure.   The VocaLink take home pay index identified the downward trend that has been observed in 2007. Annual growth has declined from 4.2 per cent in February to 3.6 per cent in August.
• Consumer price inflation fell sharply from 2.4 per cent in June to 1.9 per cent in July. This takes price growth below the crucial 2.0 per cent target for the first time in fifteen months. The large fall in July was primarily driven by a surprise fall in food retail prices, but the level of inflation has declined steadily since peaking at 3.1 per cent in March. Whilst wages are not directly measured in the calculation of inflation, they do have an indirect impact through their effect on consumer spending and production costs. The subdued increase in wages during 2007 demonstrated by the VocaLink take home pay index has therefore contributed to the decline in inflation. However, the recent fall in inflation may only provide temporary respite to the Bank of England. There are considerable upside risks from rising world food prices – which are likely to make the July supermarket discounting unsustainable. Oil may also push inflation up should the sharp price decline to $50 per barrel in September 2006 not be repeated this year. On the other hand the recent troubles in financial markets have the potential to reduce inflation, should they have a significant impact on economic growth.
• Annual growth in the Office for National Statistics Service Sector Average Earnings Index edged up to 3.5 per cent in June from 3.4 per cent in May. The growth rate has fallen significantly in 2007, from 5.0 per cent in February. This downward trend was highlighted in advance by the VocaLink figures; growth in the VocaLink services sub-index has fallen from 4.9 per cent in February to 3.3 per cent in August. Growth in the Manufacturing Sector Average Earnings Index rose to 3.8 per cent in June from 3.7 per cent in May.
• In other labour market news the claimant count for unemployment benefits fell for the tenth consecutive month from 864,100 in June to 855,300 in July. Figures from the International Labour Organisation reveal that this contributed to a decline in the rate of unemployment from 5.6 per cent in the first quarter of 2007 to 5.4 per cent in the second.
• Equity markets have proved more stable in August – although July’s losses have only partially been regained. However, the so called “credit crunch” is persisting with monetary and financial institutions less willing to take on debt from others due to uncertainty over their exposure to sub-prime securities and falling equity prices. Central Banks have stepped in to provide short term loans to banks, which should prevent them from being forced to liquidate positions in order to settle trades at the end of each day. There are number of likely impacts from the recent current market conditions. Firstly the fall in equity and sub-prime mortgage backed security values will hit profits of investment banks and hedge funds who hold significant portfolios of these assets. Secondly, whilst the actions of central banks should prevent financial crisis, the “credit crunch” and general re-evaluation of risk is likely to increase the cost of borrowing. In the corporate sector this will make investment and growth more costly – and cut firms profits as the cost of debt servicing rises. For households it is likely that mortgage and loan rates will increase and lending conditions will become stricter, also the negative impact on corporate sector profits and growth are likely to be reflected in take home pay growth  This will have a negative impact on the housing market and consumer spending. Overall, we expect the impact of the “credit crunch” to be a slight softening of the medium term inflation and growth outlook.
• The Bank of England kept rates on hold in August at 5.75 per cent following the increase in July. This move was widely anticipated given that the Monetary Policy Committee meeting occurred on 3 August – before any July data was available and in light of the troubles in financial markets. The minutes of the meeting reveal that the decision was unanimous and it is likely that interest rates will remain on hold until the outcome of the sub-prime debacle becomes clearer.
• The latest retail sales figures released by the Office for National Statistics reveal that sales volumes rose by 0.7 per cent in July from June. This took the annual growth rate to 4.4 per cent in July from 3.7 per cent in June. However the increase in volumes was driven by heavy discounting amongst retailers; annual growth in the value of sales declined from 4.4 per cent in June to 3.9 per cent in July.
• Figures released by the Nationwide Building Society show that house price growth rose by 0.6 per cent in August from July. The year on year growth rate declined to 9.7 per cent in August from 10.1 per cent in July.