21st October 2013
The squeeze on real incomes in the UK may be coming to an end and may have ended in the dominant service sector already argues Steve Davies, co-manager of the Jupiter UK Growth fund.
This will bring a boost for UK businesses that rely on the domestic consumer for their prosperity, says Davies.
“Whilst it is undeniable that UK workers have seen their real wages shrink over the last three years as pay rises have failed to keep up with inflation, there are encouraging signs that this trend may be reversing.
“The official data on average earnings show a meagre increase of 0.7% compared to a year ago, well below the current inflation rate of 2.7%. But in our view this data is being distorted as it does not factor in the increase in personal tax-free allowances or the cut in the top-rate of income tax in April 2013,” he says.
However he says a monthly survey by Vocalink, one of the country’s largest payments systems companies, shows take-home pay (ie post tax) rising by 2.4% in the 3 months to September.
Davies argues that in what he calls the all-important services sector, accounting for about 70% of UK GDP, the pace of growth in take-home pay increased to 2.7% over the same period. He says this means that real wages in the service sector of the economy are no longer declining.
“This is critical in explaining why key UK economic indicators such as the services PMI and the GfK Consumer Confidence indices really started to tick up shortly after the tax cuts kicked in.
“We fully expect the Coalition government will make sure the budget includes a number of measures aimed at putting more money in peoples’ pockets. Raising tax allowances, we believe, has already proved effective in the lifetime of this parliament. Raising them further could also prove palatable to the Liberal Democrats, the Conservatives’ coalition partners, in a way, for instance, that a cut in the rate of VAT might not,” he says.
Davies says the outlook remains bright for companies exposed to the UK domestic market, including retail banks like Lloyds and retailers such as Dixons, Howden Joinery and WH Smith, as well as Countrywide and Taylor Wimpey in the housing sector and ITV in media. All of these remain substantial holdings in the Jupiter UK Growth Fund.
“In our view, one other area to watch, particularly if house prices continue to perk up, is that of housing equity withdrawal, a phrase that has seemingly disappeared from polite society in recent years. Back in the final quarter of 2006, households extracted almost £11bn of value from their homes in order to fund other purchases, according to data from the Bank of England4. In the wake of the global financial crisis, this completely flipped around and households have been putting equity back into their housing assets to the tune of £10bn+ per quarter ever since the summer of 2010.4 Whilst a return to levels of 2006 may be both unlikely and probably unwelcome, just reducing this figure to zero could further enhance the spending power of the average UK consumer,” he adds.