VocaLink take home pay index - monthly report - March 2008

5 March 2008 – This month’s VocaLink take home pay index rose to 3.4% despite a dramatic fall in take home pay growth in the manufacturing sector.  This follows on from last month’s index which reported the lowest recorded figure since 2006.  However even with this increase, the overall level of pay growth remains well below the 4.5% The Bank of England considers to be consistent with stable inflation. Follow this link to read the full press release.

Key findings of the report
Annual growth rate in take home pay rebounded in February following a weak January performance. The VocaLink take home pay index rose from 2.8 per cent in January to 3.4 per cent in February. However, despite the lowest levels of unemployment since 1975 the overall level of pay growth remains well below the 4.5 per cent the Bank of England considers to be consistent with stable inflation.
The rebound in pay was driven by the service sector. The VocaLink service sector sub-index increased from 2.2 per cent in January to 3.5 per cent in February. It is likely that the weak January result was driven by lower bonus payments following the credit crunch.

Take home pay in the manufacturing sector posted a substantial loss following two consecutive monthly gains. The VocaLink manufacturing index declined from 3.5 per cent in January to 2.9 per cent in February. This decline follows poor performance in the final quarter of 2007 when manufacturing output failed to expand.

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

• According to the latest estimates from the Office for National Statistics 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 itself was downwardly revised from initial estimates of 0.8 per cent. Overall, 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 statistics show a labour market that is continuing to create jobs – but without significant upward pressure on wages. The claimant count for unemployment benefits declined for the sixteenth consecutive month in January, falling to 794,600 from 805,400 in December. Annual growth in average earnings including bonuses was 3.8 per cent in the three months to December, down from 4.0 per cent in the three months to November. The VocaLink take home pay index shows that pay growth in January and February remained modest.
• Wage data from the Office for National Statistics shows that annual growth in service sector wages fell to 3.9 per cent in December from 4.2 per cent in November. The VocaLink service sector sub index highlights that annual pay growth in January was very weak as poorer performance in many key sectors such as finance have damaged bonuses. Growth in the manufacturing sector average earnings index bounced back to 3.5 per cent in December from 2.6 per cent in November. This bounce was shown in the VocaLink manufacturing sub-index two months ago, and manufacturing wages growth has edged back to 2.9 per cent in February.
• Consumer price inflation edged up to 2.2 per cent in January from 2.1 per cent in December. Imported inflation from rising oil and food prices, and the depreciation of the pound continue to drive inflation. The latest Bank of England forecasts see inflation climbing in the near term to reach around 3.0 per cent by June. The Bank of England will welcome the evidence from the VocaLink take home pay index that this has so far failed to cause acceleration in wage inflation – which remains at modest levels. This should enable consumer price inflation to ease back towards target in the second half of 2008. The Retail Price Index, which incorporates housing costs and is commonly used in wage negotiations, edged up to 4.1 per cent in January from 4.0 per cent in December.
• The trend growth in retail sales strengthened in January after a weak December trading period. The annual rate of growth for the three months to January rose to 4.1 per cent, increasing from 3.6 per cent in the three months to December 2007. However, the volume of trade has been maintained by heavy price discounting. Year-on-year growth in the value of retail sales fell to 1.3 per cent in January from 2.3 per cent in December.
• Nationwide house price figures show that average prices declined for the fourth consecutive month by 0.5 per cent in February. Year-on-year growth in prices has fallen to 2.7 per cent in February from 4.2 per cent in January. Data from the Bank of England showed that the demand outlook for the housing market remains weak. The number of mortgage approvals in January was 75,000 – far below the peak of 115,000 in June 2007.
• The Bank of England Monetary Policy Committee voted to reduce interest rates by 25 basis points in February to 5.25 per cent. The minutes reveal that this move was largely due to concerns of a consumer slowdown following the difficulties in financial markets and the impact on the availability of credit. The interest rate spread between what banks’ charge to lend to consumers and the Bank of England base rate has widened since the credit crunch last year. As a result, the two interest rate cuts from the Bank of England since December were deemed necessary merely to avoid an effective tightening of monetary policy.
• The anti-inflation rhetoric from the Bank of England subsequent to the February cut suggests that the Bank will not deliver another cut for at least one month. Nevertheless the expectation that inflation will subside during the second half of the year will give the Bank some room to act. We expect interest rates to be cut by a further 75 basis points to 4.5 per cent by the end of the year.