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Steve Davis, Jupiter Unit Trust Managers

Squeeze on living standards may be coming to an end

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Steve Davies (pictured), co-manager of the Jupiter UK Growth Fund and manager of the Jupiter Undervalued Assets Fund, says the squeeze in real wages in the UK may be easing…

With research suggesting growth in take-home pay is catching up with inflation, the squeeze on living standards may be coming to an end – good news for UK businesses that rely on the domestic consumer for their prosperity.

Boosting pay packets is also likely to become a top priority for the Coalition government with a general election just 18 months away, he added.

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. By contrast, 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. In the all-important services sector, which accounts for about 70% of UK GDP, the pace of growth in take-home pay increased to 2.7% over the same period, implying that real wages in this sector of the economy are no longer declining.  In our view, 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.

Looking forward, a further rise in the tax-free allowance to GBP10,000 has already been promised by Chancellor George Osborne for 2014 but there are signs that the Conservative party may be prepared to raise it even further. With a general election due in May 2015, senior Conservative politicians have been hinting that the party is considering a manifesto pledge to raise the personal tax allowance to GBP12,500.

The move is clearly a response, in our view, to the Labour Party’s recent focus on energy prices and the cost of living generally. This early jockeying for position by the UK’s biggest political parties points to a 2014 budget that is likely to be highly political in both nature and content. 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. 

Against this backdrop, we believe that 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 WHSmith, 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 GBP11bn of value from their homes in order to fund other purchases, according to data from the Bank of England. 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 GBP10bn+ 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.

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