VocaLink take home pay index – monthly report – June 2008

4 June 2008 – The VocaLink take home pay index registered 4.1% growth in May, the second consecutive month which has shown annual pay growth of above 4%.  This is the strongest two month recording since August and September 2006. Follow this link to read the full press release.

Key findings of the report
Annual growth in take home pay eased to 4.1 per cent in May from 4.2 per cent in April. Despite this slight decline in pay growth the index has registered its strongest two months since August and September 2006. This result comes against the backdrop of a weakening UK economy, which normally reduces pay growth dramatically. However, this has probably been caused by employees pushing for greater wage increases in the face of rising inflation to avoid a squeeze on their standard of living.  Also, the reduction in the basic rate of income tax, from 22p to 20p, will boost year-on-year take home pay comparisons until May 2009.

Take home pay in the manufacturing sector rose to 2.9 per cent in May from 2.4 per cent in April. The weakening of the pound may have contributed to this increase in growth. Nevertheless, manufacturing pay growth has been weak in 2008 and remains considerably below the level of pay growth in the service sector.

The VocaLink service sector sub-index declined from a twenty three month high of 5.2 per cent in April to 4.8 per cent in May.  However, the index has registered three consecutive months above 4.0 per cent for the first time since the beginning of 2007. As with growth in the main index this is the combination of employees pushing through greater pay increases in the January pay bargaining rounds and the benefit of income tax changes for those on gross salaries of between £19,000 and £40,000 a year.
 
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 first estimate for growth in the UK economy in 2008 by the Office for National Statistics shows that it expanded by 0.4 per cent in the first quarter of 2008. This represents a marked slowdown from the 0.6 per cent growth in the final quarter of 2007, but is consistent with the view that the UK economy is in for a soft landing. We expect to see the economy grow significantly below the long-run trend rate of 2.5 per cent in 2008 at 1.5 per cent. This period of weaker growth is likely to continue into 2009.
• The economic data also showed that the manufacturing sector recorded modest growth in the first quarter, with output expanding by 0.3 per cent (downwardly revised from 0.5 per cent in the preliminary estimate). This modest performance is reflected in the low levels of pay growth measured by the VocaLink industry sub-index. Pay growth in industry has averaged just 2.8 per cent so far this year, although the upturn in growth this month may reflect the boost the sector receives from the weak pound. Services sector growth in the first quarter of 2008 was also revised down from 0.6 per cent in the preliminary estimate to 0.5 per cent with the finance and hospitality performing worse than previously estimated. The figure for the economy overall was not affected by these changes with the energy extraction industry performing better than previously thought.
• Annual growth in average earnings including bonuses, measured as a three month moving average, rose to 4.0 per cent in March from 3.7 per cent in February. Excluding bonuses earnings growth was unchanged at 3.7 per cent. Pay growth in the service sector rose sharply to 4.3 per cent in March from 3.8 per cent in February in a spike that was identified previously by the VocaLink services index. Manufacturing pay growth ticked up to 3.8 per cent in March from 3.7 per cent in April. The recent increase in the VocaLink take home pay index above 4.0 per cent highlights two key issues of critical importance to the Bank of England. The first is the extent to which workers will be able to force through higher pay settlements in the face of rising living costs. If this factor leads to persistently higher wage growth, this increases the cost of producing goods and services and so will lead to higher inflation.  The second issue is the potential for rising unemployment to mitigate pay increases. In the case of the latter we would normally expect to see pay growth decline as the labour market weakens, however, the unprecedented levels of mobility of the UK labour force may prevent this from having a substantial impact.
• Retail sales declined in April following the strong first quarter. The annual change in the value of sales on a three month moving average fell to 4.3 per cent in April from 5.2 per cent in March. 
• The latest figures on the labour market support the view that the cycle has turned. The claimant count for unemployment benefits rose for the third consecutive month in April, reaching 806,300 from a revised 799,100 in March.
• Consumer price inflation surged to 3.0 per cent in April from 2.5 per cent in March. Rising utility prices on the back of increases in the cost of oil and energy were behind the increase.
• The latest figures from the housing market show that prices continue to fall. Nationwide figures registered a sharp 2.5 per cent price decline in May, the seventh consecutive monthly fall. This took year on year growth to 4.4 per cent.
• The Bank of England Monetary Policy Committee kept interest rates on hold in May as widely expected. The surge in oil and energy prices has led to a significant change in the UK interest rate outlook. It contributed to inflation rising to 3.0 per cent in April as utility bills rose and also contributed to a substantial revision of the Bank of England’s inflation forecasts. The Bank now sees inflation rising close to 4.0 per cent over the next few months. This has put the cut in interest rates that we previously expected in June on hold. However, we still believe that at least one further interest rate cut will be delivered in 2008 for two reasons. First, the Bank is aware that the interest rate decisions it takes over the next six months will have a minimal impact on the path of inflation this year, due to the substantial lag between a change in interest rates and the affect being felt in the economy. Second, oil prices appear to have risen substantially above the level that can be justified by economic fundamentals of supply and demand, even when taking into account the depreciation of the dollar and fall in real interest rates. We expect to see a significant decline in the price of oil and energy which will help to bring inflation down over the medium term.