The latest stats show wages rising by just 1% in the year to July. And with inflation at around 3%, it’s clear many are feeling the squeeze.
How, then, do we explain car sales? If times are tough and money is tight, then the last thing you are likely to do is splash out on a big-ticket purchase like a shiny new motor.
Europeans have got the message. New car sales on the continent this year have been the lowest since records began in 1990. Yet here in the UK, September saw the highest monthly registrations since the pre-crisis times of March 2008.
I have heard a few reasons why these car sales are a special case. Those weak continental demand numbers mean the car manufacturers have heavily discounted UK prices in a desperate attempt to shift volumes.
New ownership financing models have made it appear more affordable to have a new car. And of course, we are all flush with PPI compensation, most of which has apparently found its way into new car deposits.
Even if we allow these explanations, I still think it’s an odd state of affairs. It’s the same in the housing market.
The special factors here are ultra-low interest rates and the extension of the Help to Buy scheme. But if you are struggling to make ends meet and are seeing your real wages under continual pressure, surely the last thing you do is buy a house.
Yet, both housing transactions and prices are on a rising trend. The Office of National Statistics (ONS) today claimed that UK house prices have hit record levels.
So what’s going on? My impression for a couple of years now has been that the economy is in much better shape than the media would suggest. I think the stock market would agree with me – the domestically biased FTSE Small Cap index has risen by 24% this year to a new all-time high. Most of the smaller companies I meet are doing fine.
In this industry, the full-time job is dead
In fact, I had an interesting meeting with one of them last week which provided an alternative view on those wage statistics. Matchtech is the leading recruitment agency for engineers.
Now, this is a specialist sector of the labour market focused on qualified, higher paid people; but nevertheless, they are seeing 5% wage inflation as the norm. And income levels are generally at a higher level for their contractors than they might have expected to earn a few years ago. Why is this?
That 5% number largely reflects supply and demand. Many of the industries Matchtech serves are enjoying strong demand, while ‘skill shortages’ are evident in forcing up wages.
In the UK, we are portrayed as a nation of consumers and service providers with a dangerously unbalanced economy. Yet, we have global centres of excellence in engineering.
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This is the case in deep-water oil and gas technology, in advanced automotive engineering, biotech and medical devices. Add in infrastructure investment in roads and rail, and commercial aircraft programmes moving into production phases, and it creates a lot of healthy demand.
The other driver behind these better incomes is a cultural one. Matchtech places permanent staff; but the larger part of its business is the 5,450 contractors it has out on assignment.
The cultural shift has been the acceptance and embracing of the contractor model by both employer and worker. It is significantly cheaper to engage a contractor given tax, pensions, employment rights and so on. Some of these savings are passed on in higher wage rates.
Any stigma surrounding temporary employment has disappeared, with contracting becoming the norm in IT and an increasingly popular choice in other fields like engineering. Workers have long since given up the expectation of a job for life, or even a long-term career, with a single employer.
For employers in the engineering or technology industries where work is often focused on large discrete contracts, it makes sense to tie employees’ costs directly into the contract they are working on. And when it’s completed, both sides are free to go their separate ways.
Investors are piling into this recruitment firm
This has provided a very lucrative backdrop for Matchtech. Today, it announced earnings up by 32% in the year to July and was able to increase the dividend by 15%.
Most recruitment companies are operationally geared and tend to do well during periods of expansion. Matchtech’s specialism and emphasis on contract workers rather than filling permanent jobs has also made it resilient during the recession.
Unlike some of its less stable competitors, it remained in the black and maintained its dividend.
The stock market has taken notice of these qualities. The shares have risen by over 100% in the last year. At today’s 500p, they still provide a good yield of 3.6%, and the price/earnings ratio is pitched around the market average.
That seems reasonable value for a company benefiting from both the cyclical economic upturn and some strong trends in its particular niche.
The only depressing aspect to this story is the point about skill shortages. Matchtech has been sourcing engineers from Europe to plug gaps it can’t find enough UK engineers to fill.
It is true that it focuses on recruiting for jobs which are specialist and harder to fill, hence its higher margins. But it would be nice to see our country getting the full benefit of this growth.
• This article is taken from our free twice-weekly small-cap investment email, The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in The Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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