Quarterly sector accounts, UK: October to December 2019

• In Quarter 4 (Oct to Dec) 2019, UK net borrowing from the rest of the world decreased to 1.0% of gross domestic product (GDP) compared with 3.6% of GDP in Quarter 3 (July to Sept) 2019; this was the UK’s lowest net borrowing position since Quarter 2 (Apr to June) 2011, when it was 0.5% of GDP.

• In Quarter 4 2019, households and corporations returned to net lending positions, having been borrowers in Quarter 3 (July to Sept) 2019; general government experienced a decrease in its net borrowing position but non-profit institutions serving households (NPISH) returned to net borrowing, having been lenders in Quarter 3 2019.

• The households saving ratio increased to 6.2% in Quarter 4 2019, compared with 5.0% in Quarter 3 2019, as household incomes grew while household expenditure fell for the first time since Quarter 1 (Jan to Mar) 2015.

Revisions in this release

This bulletin includes new data for the latest available quarter, Quarter 4 (Oct to Dec) 2019, and revisions to data from Quarter 1 (Jan to Mar) 2019.

This bulletin follows the National Accounts Revisions Policy.

The alternative measures of households’ income and saving

This release now incorporates the alternative measures of real household disposable income and saving. This decision was made as a result of growing user interest in the Alternative measures of households’ income and saving experimental statistics since their launch in August 2015.

In effect, the underlying data have been moved into the Households section (Section 6) of the UK Economic Accounts (UKEA)s and the accompanying analysis onto this bulletin. They are both released on the same day. Previously, the alternative measures of real household disposable income (RHDI) and households’ saving ratio were released roughly a week later.

We hope users find this timelier analysis of households’ financial situation useful and helpful, and we continue to welcome feedback by email at sector.accounts@ons.gov.uk.

Understanding the sector and financial accounts

This bulletin presents analysis on UK aggregate data for the main economic indicators and summary estimates from the institutional sectors of the UK economy that are presented in the UKEA dataset:

• public corporations
• private non-financial corporations (PNFCs)
• financial corporations
• households
• non-profit institutions serving households (NPISH)
• central government
• local government
• rest of the world

This bulletin uses data from the UKEA and provides detailed estimates of national product, income and expenditure, UK sector, non-financial and financial accounts, and UK Balance of Payments. These accounts are the underlying data that produce a single estimate of gross domestic product (GDP) using income, production and expenditure data.

Further information on the calculation of some of our main economic indicators can be found in the Quality and methodology section.

Estimates in this release

All data in this bulletin are estimated in current prices (also called nominal prices), except for RHDI, which is estimated in chained volume terms.

Current price series are expressed in terms of the prices during the time period being estimated. These describe the prices recorded at the time of production or consumption and include the effect of price inflation over time. Chained volume series (also known as real terms) have had the effects of inflation removed.

All figures given in this bulletin are adjusted for seasonality, except for the financial accounts or where otherwise stated. Seasonal adjustment removes seasonal or calendar effects from data to enable more meaningful comparisons over time.

The Population estimates for the UK, England and Wales, Scotland, and Northern Ireland used in this release are those released on 26 June 2019.

The UK was a net borrower from the rest of the world in Quarter 4 (Oct to Dec) 2019, with net borrowing at 1.0% of gross domestic product (GDP); this is down from 3.6% in the previous quarter. This means that the UK spent and invested more than it received in incomes, suggesting a need to sell off assets or build up further liabilities. It is the 85th consecutive quarter, starting in Quarter 4 1998, in which the UK has been a net borrower.

Despite overall reductions in the annual net borrowing position of general government in the last decade, other UK sectors have experienced a movement in the opposite direction over the same period. PNFCs returned to being annual net borrowers in 2013, after being net borrowers only once (2007) during the 10 years prior to that. Since 2010, the trend for households has been to decrease their annual net lending position.

As a result, UK net borrowing from the rest of the world has been 4% of GDP (or higher) in four of the last six years (since 2013). Before 2013, the UK had only experienced a net borrowing position greater than 4% of GDP on one occasion (1989) since records began in 1987. However, in 2019, UK net borrowing from the rest of the world decreased to 3.8% of GDP.

UK activity with the rest of the world

The UK’s current and capital account deficit with the rest of the world (that is, its net borrowing position) narrowed in Quarter 4 2019 to 1.0% of GDP; this is down from 3.6% in Quarter 3 (July to Sept) 2019. This is the lowest in percentage of GDP terms since Quarter 2 (Apr to June) 2011, when a deficit equivalent to 0.5% of GDP was recorded.

Excluding non-monetary gold and other precious metals, the UK’s current and capital account deficit with the rest of the world narrowed in the latest quarter to 3.1% of GDP. The deficit was further improved by a narrowing in the primary income deficit which was mainly due to an increase in the UK’s earnings from its foreign direct investment.

The decrease in the latest quarter is due to UK’s trade surplus of £8.0 billion, contrasting with the trade deficit of £3.2 billion seen in Quarter 3 2019. This is the first trade surplus since Quarter 3 1997. It was caused by the large increase in net trade of precious metals, which includes non-monetary gold, of approximately £11.6 billion. This export of precious metals is the near reverse of the importing activity that occurred during Quarter 1 (Jan to Mar) 2019, leaving the year as a whole with a deficit of £25.9 billion.

For further analysis on the UK’s economic activity with the rest of the world, please refer to the balance of payments bulletin.

Households

Households experienced their highest lending position since 2016 in both their non-financial and financial account, suggesting that the financial position of households since 2016 has improved.

The main cause of households’ increased net lending in the non-financial account was the significant rise in compensation of employees by £46.3 billion. This rise is reflected in Office for National Statistics (ONS) labour market data, which show that wages in real terms are now above their pre-financial crisis peak (approximately 2007 to 2009). This means that households have more disposable income, enabling them to save, invest or spend more. Other rises included gross operating surplus and mixed income of £9 billion and social benefit other than social transfers in kind of £8.6 billion.

These were offset by a smaller rise in final consumption expenditure of £33.3 billion, which suggests an underlying slowdown in household spending, as it rose by £56.3 billion in 2018. This appears to be confirmed by some external evidence from the Bank of England that suggests that households’ spending weakened because of greater uncertainty, including weak car purchases (which in 2019 were at a six-year low). Much of the household unsecured debt over the last few years prior to 2019 was attributed to the surge in car purchases.

Furthermore, a fall in social contributions of £13.8 billion, a rise in income on taxes and wealth of £10.6 billion, and a slight rise in gross capital formation partially offset the improvements compensation of employees made to households’ lending positions. Looking at gross capital formation, households invested less in non-financial assets, with it increasing by £2.9 billion compared with the £5.7 billion rise in 2018.

The recent downward trend of the debt to asset ratio means that households have higher assets relative to their debt, which enables them to save or lend more. In 2016, when households were last net lenders, the debt to asset ratio was relatively low (68%). This picked up again in 2017 and 2018 (reaching 91% in 2017), when households experienced a squeeze on their incomes.

After the economic downturn (which started in Quarter 2 2008 and lasted for five quarters), households deleveraged and reduced their borrowing as lending tightened. However, their debt relative to assets slowly increased as lending conditions eased following the implementation of the Bank of England’s quantitative easing programme. However, it was after 2016, with the introduction of new car finance packages and other accommodating credit conditions, that the household debt to asset ratio spiked sharply, nearly reaching its pre-financial crisis (approximately 2007 to 2009) level. In 2019, the drop in the relative debt to asset ratio can be explained by the financial account, as households saw rises in net accounts payable and receivable of £18.0 billion and a rise in holdings of currency and deposits of £5.0 billion, partially offset by an increase in net loans of £6.0 billion.

Revised data in this bulletin show that the recent economic experience of households is that they were only net borrowers in Quarter 1 2017 and Quarter 3 2019 in the non-financial account. In Quarter 4 2019, households returned to a net lending position meaning that households had disposable income available for the purchase of financial assets, for example, deposits into a savings account or for debt repayment (Figure 4).

Between Quarter 1 1997 and Quarter 1 2016, households experienced an average net lending position of 2.5% of GDP. Since Quarter 2 2016, households have seen a much lower average net lending position of 0.4% of GDP.

In Quarter 4 2019, households experienced a net lending position of 0.4% of GDP, in contrast to the small net borrowing position they experienced in the previous quarter. The main reason for this return to net lending was a fall in taxes on income and wealth paid by households of £1.9 billion. There was a particular fall in Self Assessment tax paid by the household sector.

Also providing a significant contribution to the return to net lending was an increase in wages and salaries of £1.5 billion. Although this is a smaller increase in wages and salaries when compared to the same quarter a year ago, the rise reflects recent labour market data showing that the UK employment rate was estimated at a record high of 76.5% in Quarter 4 2019; this is 0.6 percentage points up on the year and 0.4 percentage points higher than Quarter 3 2019.

However, growth in average weekly earnings for employees (including bonuses) tempered wages growth. Earnings growth in Quarter 4 2019 dropped to 2.9% for total pay, with growth impacted downwards by unusually high bonuses having been paid in October 2018, whereas those in October 2019 were at more typical levels. To further explore the latest labour market statistics, see Labour market overview, UK: March 2020.

Offsetting the positive contribution from a fall in taxes on income and increases in wages and salaries was a fall in net capital transfers received by households of £2.7 billion. The predominant driver of capital transfers for households is debt cancellations for student loans. In Quarter 4 2019, debt cancellations for student loans were not recorded in the national accounts in line with the new treatment of student loans.

Despite the recent economic experience of households showing that they are now predominantly net lenders, from Quarter 2 2016 we still see a significant fall in the amount of lending to other sectors that households can make.

Figure 4 captures the deterioration of households’ finances that began in Quarter 2 2016. Households saw a squeeze in their incomes throughout 2016 as gross disposable income grew at its weakest rate (1.8%) since 2010, while household spending on all goods and services grew at its fastest rate (5.4%) since 1998; this was partly because of inflationary pressures pushing up the price of the same basket of goods and services.

This squeeze continued in more recent periods as between Quarter 2 2016 and Quarter 4 2019, households’ surplus income after expenditure shifted the sector near to a borrowing position.

Revisions to households’ net lending or borrowing

This bulletin includes revisions to data from Quarter 1 2019 in line with the National Accounts Revisions Policy.

The largest revision to the household non-financial account occurred in Quarter 3 2019. This led to households changing from being net lenders of £1.5 billion to a small borrowing position of £0.2 billion.

The main cause of this change is forecasts being replaced with data from the redeveloped Financial Survey of Pension Schemes, which began collecting data in Quarter 2 2019. This new survey has revised our estimates of the pension contributions and benefits in the household sector.

See Appendix A for a chart summary on revisions to households’ lending or borrowing (B.9n) and the sub-components of B.9n between Quarter 1 2019 and Quarter 3 2019.

Financial corporations

In 2019, net borrowing for financial corporations in the financial account was at its highest since 2000. This was caused by financial corporations experiencing a significant fall in their deposits with both UK and the rest of the world monetary financial institutions as these fell by £283.8 billion. While flows tend to fluctuate in the financial account for financial corporations, this was the greatest annual fall since records began in 1987.

The record increase in financial corporations’ borrowing in the financial account is mirrored by activity in the non-financial account with falls in property income of £8.6 billion and gross operating surplus of £5.6 billion and a rise in social benefits other than social transfers in kind paid of £2.8 billion.

Figure 5 shows that since 2014, gross disposable income of financial corporations has followed a downward trend. In 2019, gross disposable income fell to £16.9 billion; it was last lower in 2001 when it was £15.8 billion.

In Quarter 4 2019, financial corporations were the main contributor to the UK’s improvement in its lending position by returning to a net lending position of 0.6% of GDP. This followed a borrowing position in Quarter 3 2019 of 1.5% of GDP. The Quarter 4 2019 value was the sector’s highest lending figure since Quarter 4 2012.

This was mainly caused by a fall in gross capital formation of £11.1 billion caused by a fall in acquisitions less disposal of valuables, reflecting large movements in non-monetary gold.

Another significant factor in financial corporations’ lending positions was a fall of £1.5 billion in the adjustment for pension entitlements (D.8). See the Households saving ratio section for further information.

In the financial account, financial corporations switched to net lending of £8.8 billion in Quarter 4 2019 following net borrowing of £22.7 billion in Quarter 3 2019. This was mainly caused by rises in holdings of equity and investment fund shares of £97.7 billion and currency and deposits of £72.3 billion. These were partially offset by a fall in net loans of £75.6 billion.

Private non-financial corporations

In 2019, PNFCs saw their net borrowing position in the non-financial account decrease to £23.3 billion from £24.5 billion in 2018. This decreased borrowing was caused by a rise in property income of £5.1 billion, compared with a fall of £21.0 billion in 2018.

The fall in PNFCs’ net borrowing was partially offset by rises in gross capital formation of £10.2 billion, compared with a fall of £1.6 billion in 2018. PNFCs’ investment in inventories increased by more than double from 2018 and was financed through PNFCs decreasing their currency and deposits by £28.8 billion, which is their largest annual decrease since the financial crisis (approximately 2007 to 2009).

Figure 6 shows the significant decrease in PNFCs’ deposits with UK monetary financial institutions (which includes British pounds and foreign currency deposits).

Figure 7 shows the build-up of inventories in Quarter 1 2019, as businesses increased their inventories as part of their short-term contingency planning with the anticipation of Britain leaving the EU on 29 March 2019. Businesses increased their supply of their products to customers abroad in anticipation of tariff restrictions, to finance the increase in investment. After the exit from the EU date was delayed to 31 October, businesses reduced their stockpiling activity; this is reflected in the weaker gross capital formation seen in Quarter 2 2019 to Quarter 4 2019. Users should note that within GDP, we have applied larger than usual adjustments to the expenditure approach of GDP in Quarter 4 2019 in part after heightened uncertainty around the impact of the UK’s planned exit from the EU on the timing of activity of businesses.

Despite the increase in stock building providing a positive contribution to overall investment and gross fixed capital formation (GFCF, a major component of gross capital formation) in 2019, underlying investment weaknesses for PNFCs persist. The Bank of England noted in their latest Agents’ summary of business conditions for Quarter 4 that “investment intentions remained depressed by slower global growth and political uncertainty”, “demand for credit remained weak” and “credit availability continued to be tight in some sectors”. According to the British Chambers of Commerce’s (BCC’s) Quarterly Economic Survey, the number of manufacturing industries that plan to increase investment in plant and machinery dropped to its lowest level since Quarter 4 2011.

Overall, in Quarter 4 2019, PNFCs saw their net borrowing position increase to 0.4% of GDP, from 0.3% in Quarter 3 2019. This was caused by a fall in PNFCs’ gross operating surplus of £1.5 billion, which was partially offset by a fall in gross capital formation of £0.8 billion. The fall in gross capital formation is seen because of the largest quarterly fall in acquisitions less disposables of valuables, a component of gross capital formation that fell by £1.3 billion.

In the financial account, PNFCs saw their net borrowing position increase to £8.0 billion, following net borrowing of £0.7 billion in Quarter 3 2019. This was predominantly caused by a fall in net other accounts receivable and payable of £32.1 billion. PNFCs also saw a fall in net loans of £3.3 billion. The increase in borrowing was partially offset by a £14.5 billion increase in holdings of currency and deposits, which was predominantly caused by a rise in deposits with UK monetary financial institutions of £11.5 billion.

Real household disposable income (RHDI) rose by 1.7% in Quarter 4 (Oct to Dec) 2019; this means that after considering price rises experienced by households, incomes after tax increased by 1.7% in Quarter 4 2019, a reversal of the 0.8% fall in real income that households saw in Quarter 3 (July to Sept) 2019.

A rise in nominal gross disposable household income (GDHI) contributed positive 1.6 percentage points to the RHDI increase in Quarter 4 2019, with a small contribution from inflation of 0.1 percentage point (Figure 8).

The rise in GDHI is in line with the return to net lending that households experienced in Quarter 4 2019. This is discussed in the Households subsection of the Summary of net lending or borrowing positions by sector section.

Revisions to RHDI

This bulletin includes revisions to data from Quarter 1 (Jan to Mar) 2019 in line with the National Accounts Revisions Policy.

RHDI growth has remained unchanged on average across the three quarters open for revision, with the largest revision occurring in Quarter 3 2019 of negative 0.3 percentage points.

The main cause of this change is forecasts being replaced with data from the redeveloped Financial Survey of Pension Schemes, which began collecting data in Quarter 2 (Apr to June) 2019. This new survey has revised our estimates of the pension contributions and benefits in the household sector.

See Appendix A for a chart summary on revisions to RHDI growth and for revisions to the sub-components of GDHI up to Quarter 3 2019.

Alternative measure of RHDI (experimental)

The alternative (and experimental) measure of RHDI removes imputed transactions from RHDI to better represent the economic experience of UK households. This means it captures the immediately accessible and directly observed “cash” available to households to spend or save at that given time point if they wish. Please note: the measure does not move RHDI from an accrual basis to cash basis accounting.

Deeper detail on this methodology can be found in the Alternative measures of UK households’ income and saving: April to June 2018 article.

In this cash-based approach, RHDI is estimated to have increased by 2.1% in Quarter 4 2019, compared with Quarter 3 2019. This is a stronger increase in growth compared with the national accounts basis (Figure 9).

In Quarter 4 2019, it is also worth noting that the level of RHDI on a cash basis is approximately 18% lower than the level of RHDI on a national accounts basis. That is a difference equivalent to 11% of gross domestic product (GDP), meaning that households have 11% of GDP less to spend or save when we remove incomes not immediately accessible or directly observed.

Per head, cash-based RHDI stood at £4,198 in Quarter 4 2019, up 2.0% from Quarter 3 2019.

Throughout 2019, gross operating surplus (which is made up of imputed rentals – that is, what households would pay themselves if they were to rent their own property to themselves) had been the main cause of the difference (Figure 10).

In Quarter 4 2019, the removal of net financial intermediation services indirectly measured (FISIM) has been the main cause of the stronger growth seen in the cash-basis RHDI. This is partially offset by a negative contribution from the removal of non-life insurance claims.

There are six transactions that explain the differences between GHDI on a cash basis and a national accounts basis. See Table 2 in Appendix B for a list of transactions removed from the national accounts measure of RHDI to calculate the cash-based RHDI. A cash-based deflator is also applied to cash-based GHDI to remove the effect of price changes experienced by households to calculate RHDI on a cash basis.

Revisions to the alternative measure of RHDI (experimental)

The main contributors to revisions to the alternative measure of RHDI are the same as those causing revisions to the national accounts measure.

Households save a far lower proportion of their disposable incomes from Quarter 2 (Apr to June) 2016. Most recently, the households saving ratio increased to 6.2% in Quarter 4 (Oct to Dec) 2019, compared with 5.0% in Quarter 3 (July to Sept) 2019 as household incomes grew while household expenditure fell for the first time since Quarter 1 (Jan to Mar) 2015 (Figure 11).

The saving ratio captures the income households have available to save as a proportion of their total available resources (that is, current and deferred incomes). Figure 8 breaks down how much of that available income was set aside as pension savings and how much more income is available to be used for other forms of savings (for example, investment in financial and non-financial assets).

The increase in the saving ratio in Quarter 4 2019 was because of households experiencing a rise in non-pension income available for saving while pension saving decreased considerably (Figure 12). Non-pension income increased as taxes on income and wealth paid by households fell in Quarter 4 2019. There was also a significant contribution from the increase in wages and salaries.

Non-pension income removes households’ consumption expenditure. In Quarter 4 2019, households’ expenditure fell by £0.5 billion (0.1%); this is the first time this has happened since Quarter 1 2015. The fall was caused by a £1.2 billion fall in net tourism as expenditure abroad by UK residents fell and foreign tourist expenditure in the UK rose. The £0.5 billion rise in foreign tourist expenditure reflected increases in both the number of visits to the UK and the amount visitors spent in the UK. Further detail on households’ final consumption expenditure, including a breakdown of households’ spending by product, can be found in the Consumer trends bulletin.

Households’ pension savings (that is, income set aside in pensions plus any change in the value of pension entitlements) contribution to the saving ratio was only 2.0 percentage points in Quarter 4 2019. This is the lowest contribution of pension savings on record.

In particular, there has been a fall in household pension contribution supplements. These supplements represent the income earned during the accounting period on the balance sheet values of pension entitlements that households hold.

Within these supplements, income earned on private, defined benefit schemes has fallen most markedly. For such schemes, the income earned is an actuarial estimate and is the equivalent of the unwinding of the discount rate, as payments become closer to having to be made. The estimate is derived using opening entitlements and the discount rate, which is calculated using the 15-year gilt yields index. Gilt yields decreased markedly in 2019 following concerns over a no-deal Brexit, US–China trade tensions and fears of an economic downturn.

Putting this into the context of recent history, since Quarter 1 2017, pension savings have contributed 2.6 percentage points to the saving ratio, on average. In the decade to 2017 (that is, 2007 to 2016), it contributed 5.2 percentage points on average. In the decade to 2007 (that is, 1997 to 2006), it contributed 6.5 percentage points on average, signalling a gradual fall in households’ pension savings over time.

Households’ non-pension savings (that is, income available to save, other than pension) contribution to the saving ratio was 4.2 percentage points in Quarter 4 2019. This is the highest contribution of non-pension savings since Quarter 1 2016. The main contributions to non-pension saving can be found in the Households subsection of the Summary of net lending or borrowing positions by sector section.

Since Quarter 1 2017, non-pension savings contributed an average of 3.0 percentage points to the quarterly saving ratio. In the decade to 2017 (that is, 2007 to 2016), it contributed 4.1 percentage points on average; this is higher than the decade to 2007 (that is, 1997 to 2006), when it contributed 0.9 percentage points on average.

Revisions to the saving ratio

This bulletin includes revisions to data from Quarter 1 2019 in line with the National Accounts Revisions Policy.

The saving ratio has been revised in all three quarters open for revision by an average of negative 0.1 percentage point per quarter, with the largest revision occurring in Quarter 3 2019 of negative 0.4 percentage points.

The main cause of this change is forecasts being replaced with data from the redeveloped Financial Survey of Pension Schemes, which began collecting data in Quarter 2 2019. This new survey has revised our estimates of the pension contributions and benefits in the household sector.

Alternative measure of households’ saving ratio (experimental)

This alternative (and experimental) measure removes imputed transactions from the households saving ratio to better represent the economic experience of UK households. This means it captures the immediately accessible and directly observed “cash” available to households to spend or save at that given time point if they wish. Please note: the measure does not move the households saving ratio from an accrual basis to cash-basis accounting.

Deeper detail on this methodology can be found in the Alternative measures of UK households’ income and saving: April to June 2018 article.

The cash-basis saving ratio was 4.0% in Quarter 4 2019, having been 1.9% in Quarter 3 2019 (Figure 13).

In Quarter 4 2019, the cash-basis saving ratio rose by 2.1 percentage points. This was a larger increase than the 1.2 percentage points increase seen in the national accounts savings ratio. The difference in the value between the national accounts savings ratio and the cash-basis saving ratio was caused by the removal of the adjustment for the change in pension entitlements (Figure 10). The removal of the adjustment for the change in pension entitlements effectively returns household saving to a view of saving in the current period as opposed to a recognition of all future saving.

Revisions to the alternative measure of households’ saving ratio (experimental)

The main contributors to revisions to the alternative measure of households’ saving ratio are the same as those causing revisions to the national accounts measure.

A summary of revisions in the quarter open to revisions (Quarter 1 (Jan to Mar) 2019 to Quarter 3 (July to Sept) 2019) can be seen in Table 1.

A detailed breakdown of the components of gross domestic product (GDP) can be found in the quarterly national accounts bulletin.

The balance of payments summarises the economic transactions of the UK with the rest of the world. Further detail relating to the rest of the world sector can be found in the balance of payments bulletin.

Further detail on households’ final consumption expenditure, including a breakdown of households’ spending by product, can be found in the consumer trends bulletin.

International comparisons

In Quarterly sector accounts, UK: January to March 2018, released on 29 June 2018, we published an international comparison of UK households’ net borrowing as a percentage of gross domestic product (GDP). UK households are not alone in tending toward a net borrowing position, as most G7 countries saw a similar trend. However, the UK’s experience has been more dramatic as households became net borrowers in 2017 for the first time in nearly 30 years.

In Quarterly sector accounts, UK: July to September 2017, released on 22 December 2017, we published an international comparison of the UK saving ratio. Among the G7 countries, the UK is not alone in having a declining saving ratio. Also, in our Quarterly sector accounts, UK: April to June 2017 bulletin, we noted the low UK saving ratio has become more comparable with the US, whereas the saving ratio for the euro area countries was higher.

Insurance and the national accounts

On 31 March 2017, we included details on how insurance and pensions data affect the household saving ratio and GDP to help explain the logic and impact of these transactions. These effects in the national accounts are relatively technical in nature and are not necessarily observed by households.

Flow of funds

On 7 November 2019, we published updated UK flow of funds to help users visualise the from-whom-to-whom estimates by using Sankey diagrams and heatmaps to show the counterparty relationships between institutional sectors. Since the recent global financial crisis (approximately 2007 to 2009), the international community has had an increased focus on the analysis of financial stability in aiming to better understand the build up of financial risk in different sectors of the economy. This is particularly important for countries like the UK, which have a significant financial sector. Considering the growing demand for improvements to data to support that analysis, this important area was identified internationally to develop coverage in the flow of funds.

Further analysis on households

To further investigate what households are doing with the amount of money they have available to save, Tables 6.2.7 and 6.2.8 of the UK Economic Accounts are a good source to use. Table 6.2.7 shows the accumulation of capital investment and includes expenditure on long-term non-financial assets also known as gross fixed capital formation (GFCF) (for example, expenditure on dwellings, transport equipment and intellectual property products). Table 6.2.8 sets out households’ financial activity in a given time period. This includes the accumulation of financial assets (for example, deposits, shares, and insurance and pension schemes) and the accumulation of debt (for example, long- and short-term loans).

National Statistics status

On 20 March 2018, the UK Statistics Authority published a letter confirming the designation of quarterly sector accounts statistics as National Statistics. National Statistics means that the official statistics meet the highest standards of trustworthiness, quality and value. The letter praised the richer analysis on the households sector and the improvements in communicating technical concepts to a less technical audience.

We are keen to continue this type of analysis, and we welcome feedback and suggestions for additional content for the bulletin or supplementary pieces.

Reliability

Estimates for the most recent quarters are provisional and are subject to revision in the light of updated source information. Our revisions to economic statistics page contains articles on revisions and revisions policies.

Revisions to data provide one indication of the reliability of main indicators. Revisions triangles were published for the households and non-profit institutions serving households (NPISH) saving ratio. However, following the separation of the households and NPISH sectors in September 2017, we have ceased production of the revision triangles for the households and NPISH saving ratio. In due course, we will reintroduce the revision triangle for the households-only saving ratio as and when meaningful analysis on revisions can be done.

Comparability

Data in this bulletin are internationally comparable. The UK National Accounts are compiled in accordance with the European System of Accounts 2010 (ESA 2010), under EU law and in common with all other members of the European Statistical System. ESA 2010 is consistent with the standards set out in the UN System of National Accounts 2008 (SNA 2008).

An explanation of the sectors and transactions described in this bulletin can be found in Chapter 2 of the ESA 2010 manual.

Methodology

This subsection summarises the methodology behind some of our main economic indicators: real household disposable income (RHDI), households saving ratio, and net lending or borrowing positions.

RHDI explained

Household income is measured in two ways: in current prices (also called nominal prices) and in real terms, where the effect of price inflation is removed.

Gross disposable household income (GDHI) is the estimate of the total amount of income that households have available to either spend, save or invest. It includes income received from wages (and the self-employed), social benefits, pensions and net property income (that is, earnings from interest on savings and dividends from shares) less taxes on income and wealth. These are all given in current prices.

Therefore, GDHI tells us how much income households had to spend, save or invest in the time period being measured once taxes on income and wealth had been paid.

Adjusting GDHI to remove the effects of inflation gives another measure of disposable income called RHDI. This is a measure of the real purchasing power of households’ income, in terms of the physical quantity of goods and services they would be able to purchase if prices remained constant over time. Further information on this calculation can be found in our QMI.

The households saving ratio explained

The saving ratio estimates the amount of money households have available to save (gross saving) as a percentage of their gross disposable income plus pension accumulations (total available resources).

Gross saving is the difference between households’ total available resources (that is, GDHI plus pension accumulations) and household expenditure on all goods and services for consumption.

The saving ratio can be volatile and is sensitive to even relatively small movements in its components, particularly on a quarterly basis. This is because gross saving is a relatively small difference between two large numbers. It is therefore often revised at successive publications when there are revisions to data.

The saving ratio may be considered an indicator of households’ economic confidence as well as an indicator of households’ financial conditions.

A higher saving ratio may be the result of an increase in income, a decrease in expenditure, or some combination of the two. A rise in the saving ratio may be an indication that households are acting more cautiously by spending less. Conversely, a fall in the saving ratio may be an indication that households are more confident and spending more. Other factors such as interest rates and inflation should also be considered when interpreting the households saving ratio.

Net lending (+) or borrowing (-) positions explained

The net lending or borrowing of a sector represents the net resources that the sector makes available to the rest of the economy. It does not necessarily refer to actual lending or borrowing in the normal sense; rather, it means that either a sector has money left over after its spending and investment in a given period (net lending), or it has spent and invested more than it received and has a need for financing (net borrowing), which may be covered by borrowing, issuing shares or bonds, or by drawing on reserves.

The net lending or borrowing position is determined by gross saving (that is, the balance between gross disposable income and final consumption expenditure) and is reduced or increased by the balance of capital transfers and the change in non-financial assets. This final position is called the net lending (if positive) or borrowing (if negative) position.

In summary, if actual investment is lower than the amount available for investment, the balance will be positive and this represents net lending. Alternatively, if actual investment is higher than the amount available for investment, net borrowing is represented.

Note that, theoretically, the sum of net lending or borrowing positions of UK sectors must be offset by that of the rest of the world. However, this is only currently true up to 2016 data. From 2017 onwards, supply and use tables (SUT) in the compilation of gross domestic product (GDP) are unbalanced and it can take approximately 18 months after the end of the latest balanced year (currently 2016) for balanced SUTs to become available.

Quality and Methodology Information (QMI) report

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Quarterly sector accounts QMI.

The quarterly sector accounts and the UK Economic Accounts are published at quarterly, pre-announced intervals alongside the quarterly national accounts and quarterly balance of payments statistical bulletins.

Households’ debt to income ratio

In both the Quarterly sector accounts, UK: July to September 2017 and Quarterly sector accounts, UK: April to June 2017 bulletins, we introduced analysis on the households debt to income ratio and the type of household accumulated debt (that is, mortgages versus unsecured debt). The households debt to income ratio is now included as an appendix to this release. The ratio increased in 2016 and 2017. There was a slowdown in this growth from Quarter 4 (Oct to Dec) 2017. The households debt to income ratio has remained broadly flat at around 126% since Quarter 1 (Jan to Mar) 2018. In Quarter 4 2019, it stood at 126.8%, an increase from 126.6% in Quarter 3 (July to Sept) 2019. This means that in Quarter 4 2019, households had approximately £1.27 debt for everyone £1 of income they earned over the past year.

The author, David Matthewson, would like to express his thanks to the Sector and Financial Accounts Team at Office for National Statistics (ONS) for their contributions to this work, especially in light of the recent upheaval.