VocaLink take home pay index - monthly report - February 2008

6 February 2008 – The VocaLink take home pay index saw a big decline this month falling to 2.8% in January having been at 3.4% at the end of December.  Figures reported last month for 2007 showed the lowest annual pay growth for two years and this trend looks set to continue in 2008. Follow this link to read the full press release.

Key findings of the report
Annual growth rate in take home pay declined sharply in January from December. The VocaLink take home pay index fell from 3.4 per cent in December to 2.8 per cent in January. This is the lowest level of the index since November 2006 and shows that difficult economic conditions are affecting growth in take-home pay.

Service sector pay led to the decline in the overall index. The VocaLink service sector sub-index fell from 3.3 per cent in December to 2.2 per cent in January. This is likely to reflect weaker profits in the service sector meaning that bonuses are lower than expected. Two of the sectors which are likely to have been most severely affected are finance and retail which have been hit by the credit crunch and the poor Christmas trading period

Take home pay in the manufacturing sector posted its second consecutive gain. The VocaLink manufacturing index increased from 3.3 per cent in December to 3.5 per cent in January. This is the strongest rate of growth since August 2007.

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 estimates that the UK economy expanded by 0.6 per cent in the fourth quarter of 2007. This surpassed expectations of a 0.5 per cent expansion, but represents a slowing of activity from the 0.7 per cent recorded in the third quarter which was also downwardly revised from initial estimates of 0.8 per cent. The figures reveal that the UK economy accelerated in 2007, with GDP growth increasing to 3.1 per cent, from 2.9 per cent in 2006. The service sector remained buoyant in the fourth quarter, with output expanding by 0.7 per cent from the third quarter. However, manufacturing failed to record any growth in the fourth quarter.
• The latest figures reveal that year-on-year growth in the Office for National Statistics’ average earnings index including bonuses was unchanged at 4.2 per cent in November from October. Excluding bonuses, average earnings growth edged down to 3.6 per cent in November from 3.7 per cent in October. Wage growth has come under pressure in December and January as the UK economy has shown signs of slowing. The VocaLink take home pay index shows that pay growth in January was at its weakest since November 2006.
• The latest Office for National Statistics estimates show that annual growth in service sector wages fell to 4.2 per cent in November from a downwardly revised 4.3 per cent in October. The VocaLink service sector sub index shows that service sector pay has weakened over the new year as less buoyant economic performance has affected bonuses and pay. This affect is likely to be especially acute in certain sectors such as finance, retail and real estate. Growth in the manufacturing sector average earnings index edged up from 2.5 per cent in October to 2.6 per cent in November. This arrests the sharp decline in manufacturing pay growth in the second half of 2007. The VocaLink manufacturing sub-index suggests faster pay growth over the next two months.
• Consumer price inflation was unchanged for the third consecutive month in December at 3.1 per cent, marginally above the Bank of England’s target. The UK has been insulated from the recent upsurge in prices which has sent inflation in the USA and eurozone significantly above target. Despite the rising prices of transport, energy and food inflation has so far been held close to target levels by falling prices of clothing, communications and recreational activities. The Retail Price Index, which incorporates housing costs and is commonly used in wage negotiations, fell to 4.0 per cent in December from 4.3 per cent in November. 
• The retail sector performed poorly over the important Christmas trading period. Annual growth in the value of retail sales fell to 2.3 per cent in December from 3.4 per cent in November. The restriction of borrowing following the credit crunch is having a significant impact on the retail sector as households are less able to borrow money to counteract the low levels of take home pay growth.
• Nationwide house price figures show that average prices declined for the third consecutive month, albeit by just 0.1 per cent in January. Year-on-year growth in prices has fallen to 4.2 per cent – down substantially from the peak of 11.1 per cent in June 2007.
• The Bank of England chose to keep interest rates on hold in the January meeting at 5.5 per cent. The monetary policy members considered the continuing threat of inflation and lack of clear evidence on the extent of an economic slowdown as reasons to leave rates unchanged. We expect the Bank to continue its gradual easing of monetary policy in February with a quarter point interest rate cut to 5.25 per cent. Data since the January meeting has shown that the housing and retail markets have continued to slow.
• The UK economy continued to create jobs through the third quarter of 2007. The claimant count for unemployment benefits declined to 807,700 in December, this is the lowest level for over twenty five years. Importantly for the Bank of England the low levels of unemployment have not yet led to a significant increase in wage inflation.