VocaLink take home pay index - monthly report - April 2008

8 April 2008 – This month’s VocaLink take home pay index saw another slight rise from 3.4% to 3.6% in March, continuing the upward trend for 2008. However, despite the overall increase in the rate of take home pay, average wage growth in the first three months of 2008 has been considerably less than in 2006 and 2007. At the end of the first quarter, there are also marked differences between the manufacturing and services sectors. Follow this link to read the full press release.

Key findings of the report
Annual growth rate in take home pay rose in March from February. The VocaLink take home pay index rose from 3.4 per cent in February to 3.6 per cent in March. Despite the increase, average wage growth in the first three months of 2008 has been substantially less than that in 2006 and 2007 – supporting the Bank of England’s balancing act of trying to boost the economy whilst keeping inflation under control.

Pay growth in the service sector registered strong growth for the second consecutive month. The VocaLink service sector sub-index increased from 3.5 per cent in February to 4.2 per cent in March.

Take home pay in the manufacturing sector moved in the opposite direction to services, declining for the second consecutive month. The VocaLink manufacturing index fell from 2.9 per cent in February to 2.4 per cent in March.

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 VocaLink take home pay index shows that wage inflation has grown at a modest rate so far in 2008 which is helping to restrain inflation. Wages expanded at an annual rate of 3.3 per cent over the first three months of 2008. This represents a marked slowdown from 4.1 per cent growth in 2006 and 3.5 per cent in 2007. The most important impact of this trend has been to help the Bank of England keep inflation under control and allow it to follow a more expansionary interest rate policy. The Bank considers wage growth of 4.5 per cent to be consistent with inflation at the target level of 2.0 per cent, the fact that wage growth has been significantly below this level has helped insulate the UK from the huge increases in energy, food and other commodity prices. Oil prices have risen by over 60 per cent over the last twelve months, wheat prices have more than doubled – yet despite this shock to the economy the overall rate of inflation is currently just 2.5 per cent.
• The latest estimates show that the UK economy grew by 0.6 per cent in the fourth quarter of 2007, slowing from 0.7 per cent in the third quarter. The strongest performing sector was transport and communications which expanded by 1.9 per cent in the fourth quarter. Agriculture, forestry and fishing and utilities also performed well, each expanding by 1.7 per cent. Output growth in the finance and business services sector slowed markedly as a result of the credit crunch. The fourth quarter saw growth of 0.5 per cent, down from 1.3 per cent in the third quarter for this sector. The complete figures for 2007 show that the economy expanded by 3.1 per cent from 2006.
• Retail sales volumes registered strong growth in February, expanding by 0.9 per cent. This follows brisk trading in January when sales grew by 1.1 per cent. The annual rate of growth for the three months to February rose to 4.7 per cent, increasing from 4.4 per cent in the three months to January. However the strong performance of sales volumes was helped by price discounting, the value of retail sales has risen by 2.6 per cent over the last twelve months.  
• The labour market continues to tighten but this trend may be slowing. The claimant count measure of unemployment fell for the seventeenth consecutive month – by 2,800 in January to 793,500. However, this was lower than expectations of a 5,000 fall. The rate of unemployment fell marginally to 5.2 per cent in January, down from 5.3 per cent in the previous quarter and in line with expectations.
• Annual growth in average earnings including bonuses , measured as a three month moving average, declined slightly to 3.8 per cent in January, from 3.9 per cent in December. Excluding bonuses, average earnings growth remained at 3.7 per cent in January from February. The fall in average earnings figures have shown a marked decline in pay growth since last Autumn, following the trend identified by the VocaLink index. Similarly, both the sharp increase in manufacturing pay growth and the sharp fall in service sector pay growth shown in the latest average earnings index figures between October and January were previously shown by the VocaLink figures.
• Public sector net borrowing in February was £2.7 billion, slightly more than the £2.5 billion in the previous year. Cumulative government borrowing for this financial year now stands at £27.8 billion and total net debt has reached 36.0 per cent of gross domestic product, excluding Northern Rock.   
  Consumer price inflation rose to 2.5 per cent in February from 2.2 per cent in January. The greatest price rise came from housing and utilities costs – which increased by 3.2 per cent in February from January as recent increases in gas and electricity prices were factored in to the index. Other contributors to the overall price increase came from furniture and household equipment and alcohol and tobacco, which were up by 1.3 per cent and 1.1 per cent in February respectively. These data relate to the period before the Chancellor’s new alcohol and tobacco taxation.
  The latest Nationwide house price figures show that house prices continue to decline, falling by 0.6 per cent in March from February. This takes year on year house price growth to 1.1 per cent, the lowest since 1996.
   
• The Bank of England Monetary Policy Committee voted to keep interest rates on hold at 5.25 per cent in March by a margin of seven to two. The minutes from the meeting reveal that the MPC identified that the continued pressure from commodity prices and the depreciation of sterling were adding to short term inflationary risks. Their concern is that above target inflation will lead to second round effects from wage setters, pushing up medium term inflation expectations. However the VocaLink take home pay index shows that wage growth has actually moderated over the year. The Monetary Policy committee will hope that this continued to be the case as the recent rise in the cost of inter-bank lending and the emergency takeover of Bear Sterns add to the pressure for an April cut.