VocaLink take home pay index – monthly report – January 2008

8 January 2008 – The VocaLink take home pay index increased to 3.4% in December from 3.2% in November.  Despite this month’s slight increase, 2007 has proven to be the weakest year for pay growth since the inception of the VocaLink take home pay index in 2005.  Last year saw take home pay increase by just 3.5%, this figure falls considerably short of the 4.1% increase in 2006 and 4.6% in 2005. Follow this link to read the full press release.

Key findings of the report
Annual growth rate in take home pay edged up last month, taking the VocaLink take home pay index up to 3.4 per cent in December from 3.2 per cent in November. Pay growth has been relatively weak over the course of the year. The December data confirms that take home pay increased by 3.5 per cent in 2007 as a whole, compared with 4.1 per cent in 2006 and 4.6 per cent in 2005.

The VocaLink service sector sub-index was unchanged in December from November at 3.3 per cent.

Take home pay growth in this sector has been performing poorly since April, prior to the credit crunch which began in late June.

Take home pay in the manufacturing sector recovered slightly in December. The VocaLink manufacturing index increased from 2.9 per cent in November to 3.3 per cent in December. This is the strongest rate of growth since August.

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 Office for National Statistics revised down its estimate of quarter-on-quarter UK economic growth to 0.7 per cent from the preliminary estimate of 0.8 per cent in the third quarter of 2007.  This still represents a robust economic performance; with the economy expanding by 3.3 per cent in the year to the third quarter. The output of the service sector increased by 0.8 per cent, the same rate as in the second quarter. The manufacturing sector fared worse.  The previous estimate was of 0.2 per cent growth however output failed to expand at all.
• The latest figures reveal that year-on-year growth in the Office for National Statistics’ average earnings index including bonuses edged down to 4.2 per cent in October from 4.3 per cent in September. Excluding bonuses, average earnings growth also fell to 3.7 per cent in October from 3.8 per cent in September. The VocaLink take home pay index is currently below the level of average earnings index estimates, suggesting that these figures are likely to perform weakly in November and December.
• The latest Office for National Statistics estimates show that annual growth in service sector wages rose from 4.3 per cent in September to 4.4 per cent in October. As with the VocaLink take home pay index, these figures do not yet reflect any negative impact the credit crunch may have on wages. The pace of service sector wage growth has increased since the onset of the credit crunch in June. Growth in the manufacturing sector average earnings index declined from 3.0 per cent in September to 2.5 per cent in October. This is the third consecutive sharp decline in manufacturing wage growth and closely follows the trend identified by the VocaLink manufacturing index. The evidence suggests that UK manufacturers are facing tough trading conditions given rising input, energy costs and foreign competition which benefits from the strength of the pound.
• Consumer price inflation remained marginally above the Bank of England’s target in November at 2.1 per cent, unchanged from October. However, it had been expected that inflation would rise further due to the strong annual growth in transport and food costs. The Retail Price Index, which incorporates housing costs and is commonly used in wage negotiations increased to 4.3 per cent in November from 4.2 per cent in October.
• The Bank of England cut interest rates from 5.75 per cent in November to 5.5 per cent in December. The minutes from the Monetary Policy Committee meeting reveal that the decision was taken unanimously, which could pave the way for further cuts as the Bank seeks to minimise a possible slow down in the economy in 2008.
• The UK economy continued to create jobs through the third quarter of 2007. The claimant count unemployment rate was at the lowest level since June 1975. The number of benefit claimants fell to 813,000 in November, down from 824,100 in October.
• Annual growth in the value of retail sales dipped to 3.4 per cent in November from 3.5 per cent in October. Growth has declined significantly since the spring, in April it stood at 5.3 per cent. Despite this slowdown, the current sales levels remain robust. However there may be a further deceleration of growth in the new year due to a weak housing market, the credit crunch and slack take home pay growth.
• Evidence of the cooling housing market continues to accumulate. The December Nationwide house price data is showing a 0.5 per cent fall in prices and the Council of Mortgage Lenders revealing gross lending down 8 per cent in November from October. At least one rate cut by the Bank of England is likely in the first quarter of 2008 to counteract these trends.