Annual three month growth on the VocaLink FTSE 350 index, which is a measure of private sector earnings, dropped 1.1 percentage points in two months to reach 0.6% in January. This is its lowest level since June 2010 and only 0.1 percentage point above its record low in May 2010. By contrast, annual growth on the VocaLink Public Sector Take Home Pay Index edged back up to 1.3% from its drop to 1.1% in December.
With the preliminary estimate of GDP growth for Q4 2010 suggesting the UK economy contracted by 0.5% quarter-on-quarter, this months VocaLink data provides further support to the view that the UK recovery faces significant headwinds in 2011.
The VocaLink services sector sub-index, at 0.7% three month annual growth shows a sharp decline from 1.2% in December and 1.7% in November. The private services sector accounts for approximately 65% of employment in the UK. As such, the sector is crucial in helping to soak up the job losses from the public sector. This latest decline therefore casts a shadow over its ability to do so.
The weakness in the manufacturing index, where annual take home pay growth remained at the lowest ever recorded figure of 0.4%, is a little more surprising given the sectors resilience in 2010. One explanation for the sluggish growth in manufacturing take home pay, despite a rise in output, is the VAT rise to 20% in January and elevated prices of global commodities, particularly oil, which reached its highest level since October 2008.
D.C.