Economic well-being, UK: July to September 2014

• In Q3 2014, GDP per head increased 0.6% compared to Q2 2014 but remains 1.8% below pre-economic downturn levels. This was a slightly slower growth rate than the 0.7% quarterly increase seen in GDP
• Net National Disposable Income (NNDI) per head, which represents the income for UK residents, has remained broadly flat since Q1 2012 and remains 5.6% below pre-economic downturn levels
• In Q3 2014, household income (RHDI) per head decreased 0.2% on the quarter, but remains broadly in line with its pre-economic downturn levels. However, despite recent improvements, households still consider their financial position to be slightly worse than a year ago
• In Q3 2014, household spending per head grew 0.8% compared to the previous quarter – continuing the general upward trend that started in Q3 2011
• In 2012/13, median income fell 1.4% compared to 2011/12 to £23,300, its lowest level since 2002/03
• Between 2011/12 and 2012/13, there was a slight increase in income inequality
• In 2013, the net wealth of the economy as a whole increased 4.4% to £7.6 trillion. In the same year, household net wealth increased 2.6% mainly due to an increase in the value of dwellings

We consider the measurement of economic or material well-being. Presenting a dashboard of indicators and commentary that, together, give a more rounded and comprehensive basis for assessing changes in economic wellbeing, as proposed in the November 2014 Framework and Indicators article.

Economic well-being is a subset of the overall issue of measuring national well-being and recognises that many dimensions of well-being are outside the material sphere (for example, the ONS “Wheel of Well-being”).

Real GDP per head

In Q3 2014 Gross Domestic Product (GDP) per head, which adjusts GDP for the size of the population, increased 0.6% compared to Q2 2014. This was a slightly slower growth rate than the 0.7% quarterly increase seen in GDP, which recovered to its pre-economic downturn peak level in Q3 2013. Despite the quarterly growth, GDP per head remains 1.8% below its pre-economic downturn peak level.

Real NNDI per head

In Q3 2014, Net National Disposable Income (NNDI) per head remained broadly unchanged on the quarter, increasing 0.1%. This was a slower growth rate than the 0.6% quarterly increase seen in GDP per head.

As discussed in the Economic well-being - Framework and Indicators article there are two key differences between GDP per head and NNDI per head.

First, not all income generated by production in the UK will be payable to UK residents. Some of the capital employed will be owned by non-residents and they will be entitled to the return on that investment. Conversely, the UK’s residents receive income from production activities taking place elsewhere, based on their investments overseas. Adjusting for these flows gives a measure which is better focused on income rather than production.

Second, it can be adjusted for capital consumption. GDP is “gross” in the sense that it does not adjust for capital depreciation - that is to say the day-to-day wear and tear on vehicles, machinery, buildings and other fixed capital used in the productive process. It treats such consumption of capital as no different from any other form of consumption. But most people would not regard depreciation as adding to their material well-being.

GDP per head and Net Domestic Product (NDP) per head track reasonably well over the course of the recession, suggesting that the impact of capital consumption is relatively low.

However, Net National Disposable Income has behaved somewhat differently, particularly since late 2011. Net National Disposable Income, which represents the income generated by production that is payable to UK residents, has remained broadly flat since Q1 2012. In Q3 2014 NNDI remained 5.6% below its pre-recession peak, this is compared to GDP per head which was 1.8% below its pre-recession peak in the same quarter.

Perception of the economic situation

In addition to the improvements seen in the latest quarter in these indicators, the Eurobarometer survey asks respondents how they think the general economic situation has changed over the last 12 months. In September 2014 the aggregate balance stood at -3.4, suggesting that on average, respondents now think the economic situation is broadly similar to a year ago. This is a continuation of the improvement seen throughout 2014, showing an improvement in perceptions of the general economic situation. At its lowest, in May 2009, the Eurobarometer reported -82.3 for the general economic situation.

In Q3 2014 real household income (RHDI) per head decreased 0.2% on the quarter, but remains broadly in line with its pre-recession levels. Compared to Q3 2013, real household income per head increased by 0.4%.

Household income focuses on the income that is available to households, rather than the measures of income used in the previous section which includes the income of firms, financial corporations and government as well as households. This section looks at income of households, their perceptions of their income and the distribution of income across households.

As GDP began to fall in mid-2008, real household income per head remained fairly buoyant. By Q2 2009, real household income per head was 3.8% above its pre-recession level. This initial improvement in real household income per head was a result of several factors. Firstly, interest rates reached historic lows and therefore many people’s mortgage interest payments fell. This meant many householders’ disposable incomes rose as a result of lower mortgage payments. Additionally, as employment fell and unemployment rose, people paid less in the way of taxes and claimed more in the way of benefits. The result was that real household incomes were supported by rising social security benefits and reduced taxes.

However, moving into early 2011, the impact of these factors had worn off and inflation had risen. The increase in prices eroded the growth of household incomes, as prices were rising at a faster rate than people’s incomes, and therefore over time, people found their income purchased a lower quantity of goods and services.

Since 2011, despite lower growth in the price level, real household income per head has remained broadly flat. Overall, by Q3 2014, real household incomes per head were slightly above their pre-recession level.

For international comparisons it is also important to adjust for benefits in kind, this series is available in the reference tables.

Perception of household income

As well as considering levels of household income, it is important to consider individuals perceptions of their own income. The Eurobarometer Consumer survey asks respondents their views on the financial situation of their household over the past 12 months. A negative balance means respondents reported their financial situation got worse, a positive balance means they reported it improved¹.

Between the end of Q2 2014 and Q3 2014, the balance increased from -8.3 to -7.6. This follows the sharper increases seen since early 2013. However, despite the continued increase, the series remains slightly negative which means that, on average, households feel their financial situation has worsened slightly over the past 12 months.

The Eurobarometer also asks respondents their views on whether now is a good time to save. Between the end of Q2 2014 and Q3 2014, the balance increased from -6.9 to -6.4. However, the series remains slightly negative; suggesting that respondents continue to believe now is not a good time to save. Despite this view, households reported saving at least some of their income.

Additionally, Understanding Society provides information on the proportion of individuals that report being somewhat, mostly, or completely, satisfied with the income of their household, and the proportion of households that report finding it quite, or very, difficult to get by financially.

In 2012/13 the proportion of individuals that reported finding it difficult to get by financially was 10.1%. This was 0.8 percentage points lower than 2011/12, continuing the slight downwards trend that has been seen since it peaked in 2009/10.

In 2012/13 the percentage of respondents that were somewhat, mostly, or completely, satisfied with their level of income was 53.4% - up 0.8 percentage points from 2011/12. Satisfaction with income saw a downward trend between 2007 and 2011/12, recording a 4.7 percentage point decline between 2010/11 and 2011/12. Whilst the increase in 2012/13 shows some improvement in this trend, it remains below the levels seen prior to the economic downturn.

Distribution of income²

In 2012/13 median income (the income of the middle household if all households are ranked from the lowest income to the highest) fell 1.4% to £23,300. This is a continuation of the downward trend that has been seen in median income since 2009/10 and results in median income in 2012/13 being at its lowest level since 2002/03.

As it represents the middle of the income distribution, the median household income provides a good indication of the income of the “typical” household. However, is also important to consider how income is distributed around the middle, considering the equality of the income distribution. The indicator used here is the ratio of total income received by the richest fifth of households to that received by the poorest fifth. If the ratio gets larger then it implies increasing inequality between the top fifth and bottom fifth of households.

Between 2011/12 and 2012/13 this ratio saw a small increase from 5.1 to 5.3, suggesting a slight increase in income inequality. There were two reasons for the increase in this ratio; firstly, the income of the poorest fifth declined by 3.3%, in addition the income of the richest fifth increased by 1.6%.

This is contrary to the trend seen between 2007/08 and 2011/12, which saw continued decreases in the ratio. Over the four year period, the average income of the poorest fifth increased 7.0%, while the richest fifth of households saw income fall by 6.7%. The largest fall in the income of the richest fifth was between 2010/11 and 2011/12, with income falling 6.2%.

However, as shown in figure 3, overall movements in the ratio over the last ten years have been relatively small when compared to earlier periods.

Notes for household income

1. The Eurobarometer is collected by GFK for the European Commission. There is more information about interpreting the Eurobarometer Consumer survey in background note 5.

2. The income measure used in this section is real equivalised household disposable income. Disposable income is the amount of money that households have available for spending and saving after direct taxes (such as income tax and council tax) have been accounted for. It includes earnings from employment, private pensions and investments as well as cash benefits provided by the state. Equivalisation is the process of accounting for the fact that households with many members are likely to need a higher income to achieve the same standard of living as households with fewer members.

Whilst looking at income is a viable measure of the material well-being in the economy, a fuller picture of the economic well-being of a country can be found by looking at how much households consume.

In June 2014, we published an article that presented new findings on the relationship between personal well-being, household income and expenditure using regression analysis. It found that household expenditure appeared to have a stronger relationship with personal well-being than household income.

In Q3 2014 real household spending per head grew 0.8% compared to the previous quarter – continuing the general upward trend that started in Q3 2011. However, real household spending per head remains 3.1% below its pre-economic downturn levels. This is despite real household incomes per head remaining broadly around their pre-economic downturn levels (see Household Income section).

Since Q2 2011 real household spending per head has steadily increased. This could reflect improved economic sentiment among households. More recently, the pace of growth in real household spending per head has picked up. This reflects the improvements that have recently been seen in the Eurobarometer economic sentiment indicator.

As with household income, for international comparisons it is important to consider benefits in kind. The Real Household and NPISH Actual Final Consumption per head series, which makes the adjustment for benefits in kind, can be found in the reference table.

Total net wealth¹

In 2013, the net wealth of the economy as a whole (of households, businesses and the Government) increased 4.4%, to £7.6 trillion. Total net wealth is the sum of the values of financial assets (for example, shares and deposits) and non-financial assets (for example, dwellings and machinery), minus financial liabilities.

In 2013, the increase was mainly attributable to an increase in the net wealth of financial corporations, which increased by £421 billion (373%). This increase was somewhat offset by non-financial corporations, where wealth decreased between 2012 and 2013.

This measure has not been adjusted for inflation, which was 2.6% on average, as measured by the CPI between 2012 and 2013. This suggests that the growth in total net wealth was stronger than the growth in the general price level.

The net wealth of the economy as a whole is important as it indicates the sustainability of current levels of production and corresponding income flows. It is possible that a nation might be increasing its output, but is wearing down its stock of net assets. This means that level of production is unsustainable, or vice versa. However, for a complete appraisal of sustainability, natural, human and social capital should also be considered².

Figure 5 shows total net wealth between 2004 and 2013 for the whole economy, and three of the sectors: households, financial and non-financial corporations. Between 2004 and 2007, total net wealth increased year-on-year, mainly attributable to an increase in household non-financial assets. Net wealth then fell in 2008 and 2009, before increasing again following the economic downturn.

Household net wealth

Contributing to the increase in total wealth, in 2013 household net wealth increased 2.6%. As with total wealth, this measure has not been adjusted for inflation, and therefore some of the increase in wealth could be a result of an increase in price levels.

Household net wealth considers households financial position and includes non-financial assets such as houses³. Figure 6 shows the household net wealth position by type of asset between 2004 and 2013.

The main contributing factor behind the 2.6% increase in household net wealth, between the end of 2012 and the end of 2013, was a 4.8% increase in the value of household dwellings. However, the annual growth rate in overall household net worth was lower as a result of slower growth in ‘other non-financial’ (2.1%) and ‘net financial’ (0.1%) assets at the end of 2013 compared to the end of 2012. Between the end of 2008 and the end of 2013, the total value of UK household dwellings has increased by 20.0%. Household dwellings continued to make up over half (52%) of household net worth at the end of 2013.

Distribution of household wealth

In 2010-12 median household wealth (the wealth of the middle household if all households are ranked from the lowest wealth to the highest) was £218,400, an increase of 6.9% compared to 2008-10.

Median wealth has not been adjusted for inflation, and therefore some of the increase in wealth could be a result of an increase in price levels.

Data on the distribution of wealth are only available from 2006. However, these data suggest the wealth of a ‘typical’ household has been increasing since 2006.

As it represents the middle of the wealth distribution, the median household wealth provides a good indication of the wealth of the “typical” household. However, it is also important to consider how wealth is distributed around the middle, considering the equality of the wealth distribution. The indicator used here is the ratio of the wealth of the 80th percentile household, relative to the 20th percentile household, referred to as the P80:20 ratio. Although this is not the same as the S80:20 ratio, considered in the income section, it can be interpreted similarly: if the ratio gets larger then it implies increasing inequality between the top and bottom fifth of households.

The ratio for 2010-12 was 1:16 – indicating that the household at the 80th percentile of the wealth distribution held 16 times more wealth than the household at the 20th percentile of the distribution.

Notes for wealth

1. Here ‘net’ is used to describe the net wealth position (assets minus liabilities), rather than making an adjustment for capital consumption.
2. These measures are currently under development as part of the Measuring National Well-being programme and will be included in future releases where relevant.
3. Other non-financial assets includes ‘Other buildings and structures’, ‘Machinery and equipment’, ‘Cultivated biological products’, ‘Intellectual property products’, ‘Inventories’ and ‘Contracts, leases and licences’.

In the three months to September 2014 the unemployment rate was 6.0% - down 0.3 percentage points from the three months to June 2014 (2014 Q2). Although the headline rate of unemployment has fallen sharply over the past year, it remains above its pre-recession level.

Unemployment can have an impact on economic well-being through the impact on individuals’ income, as well as a direct impact on their personal well-being (how satisfied they are/how worthwhile they consider their life to be/ their happiness and anxiety levels).

Looking at the unemployment figures in more detail, while rates of longer term unemployment have come down slightly, much of the recent fall is due to lower short term unemployment (workers who have been unemployed for less than six months).

In September 2014 (the final month of 2014 Q3), the rate of inflation was 1.2%. This was 0.3 percentage points lower than in August, and sharply lower than during 2011 and 2012. The fall in the rate of inflation seen during 2014 Q3 is a continuation of a downward trend that started in mid-2013. Much of this moderation in inflation has come about as a consequence of abating energy costs and food and drink prices.

The rate of inflation is important for economic well-being for its effect on income and net wealth.

When prices increase faster than income, over time, incomes can buy less and households feel worse off. Equally, if incomes increase faster than prices, over time, incomes can buy more and households feel better off. The income section of this release considers the evolution of household income, adjusted for inflation.

In addition, inflation can impact on households through its effect on net wealth. If inflation is lower than the interest rates offered to households by banks, then the real value of savings increases. Similarly, if inflation is higher than these interest rates then the real value of savings decreases. Since 2013, the lower inflation rate has provided an improved situation for savers. However, higher levels of inflation can also act to erode away debt, as it becomes worth less in real terms over time.

Inflation experiences of different households

The Consumer Prices index (CPI) measure captures the general price level in the economy, however, our recent analysis shows that the inflation experience of UK households varied between 2003 and 2014.

The rate of inflation experienced by households that spend less has been higher than that experienced by households that spend more; an average of 3.3% per year between 2003 and 2014 for lower spending households compared to 2.3% per year for the higher spending households.

The inflation rate experienced by households also differs by the income level of the household. The rate of inflation experienced by the lowest income households has averaged 2.7% per year, compared with 2.4% per year for those around two-thirds of the way up the income distribution.

Price growth has also been faster for retired households than for non-retired households, and for households without children compared to households with children, although these differences are smaller than those seen between income and expenditure groups.

Together these findings suggest that inflation is impacting on some households more than others.

Perceptions of inflation

As with income, it is important to consider individuals perceptions of price trends. The Eurobarometer Consumer Confidence survey asked respondents how they thought consumer prices had developed over the past 12 months. Perceptions of price change over the last 12 months have mapped reasonably well to actual changes in price levels. There has been a general downwards trend since mid-2011 with the aggregate balance standing at 27.7 in September 2014, which is similar to the level in January 2008.