Vocalink

• The VocaLink Take Home Pay Index drops 3 percentage points to fall to 0.5 per cent in May - a new record low for the Index
• Services sector pay growth also falls to a new low, losing 0.4 per cent in May to hit 0.3 per cent
• The VocaLink manufacturing sub-index provides positive news in May, climbing 6 percentage points to reach 2.2 per cent

London, 3 June 2010: For the second month in a row, the VocaLink Take Home Pay Index is at its lowest level ever recorded since its introduction in 2004, sitting at just 0.5 per cent. The Index has now hovered below 2.0 per cent for the past twelve months and below 1.0 per cent since February 2010, reflecting weak earnings growth, particularly since the start of this year.

With consumer price inflation - the Government's target measure of inflation - greater than or equal to 3.0 per cent between January and April 2010, income growth has clearly not been keeping up with the expansion in prices, causing real income growth to remain weak. The average UK household has therefore seen levels of discretionary income diminish during 2010.

The VocaLink services sub-index also fell in May by 0.4 percentage points to hit 0.3 per cent, reflecting its lowest level on record. Services sector pay growth is now a full 1.8 per cent lower than the same time last year and has been gradually decreasing since December 2009. Wages are likely to grow sluggishly as employers in the service sector have spare capacity as a result of not shedding labour as quickly as output was lost during the recession.

The VocaLink manufacturing sub-index, however, bucks the overall trend in May to reach its highest level since September 2009. This positive movement is also reflected in the recent Manufacturing PMI data which remained steady in May at 58.0, with a score above 50 signaling expansion. This data suggests that the depreciation of sterling has acted as a "shot in the arm" to new export orders, supporting the strengthening performance of the UK manufacturing sector, particularly when compared to other European countries. However, the ongoing weakness in the eurozone as the UK's biggest export market could pose a challenge in the months ahead. Rising inflation may also hit UK manufacturing competitiveness over the medium term by increasing the price of inputs.

Marion King, Chief Executive Officer at VocaLink, said: "Over the year to date, the average growth level of the VocaLink Take Home Pay Index has been just 0.8 per cent, compared to 2.9 per cent over the same period in 2009. The Index shows real income growth remaining weak, particularly in the services sector which is using excess capacity to service initial increases in demand as the economy gradually recovers. The figures continue to point towards testing times throughout the rest of the year for the average UK household."

Douglas McWilliams, Chief Executive of economics consultancy cebr, said: "Our view remains that inflation will ease back over the rest of 2010, but as the Bank of England revealed in its May inflation report, consumer price inflation is likely to remain above 2.0 per cent for the rest of the year. At the same time, we believe earnings growth will remain weak, as the recovery in UK economic activity is only likely to occur gradually. At the same time, competitive pressures on businesses remain high and many will be awaiting the new Government's emergency budget expected later this month before making decisions about staffing and salaries."

VocaLink processes over 90% of UK salaries and the VocaLink Take Home Pay Index, established in 2004, provides the most timely and accurate disposable income data available in the UK. It is based on actual payments made to employees on a three-month moving average compared with the same continuation measure a year earlier. It is affected by changes in tax rates, National Insurance and other employer payments or deductions.

Follow this link to view the full statistical report.