Economic well-being, UK: January to March 2015

• In Q1 2015, gross domestic product (GDP) per head increased 0.2% compared to Q4 2014 but remains 0.6% below pre-economic downturn levels. This was a slightly slower growth rate than the 0.4% quarterly increase seen in GDP

• Net national disposable income (NNDI) per head, which represents the income available to UK residents, increased 1.6% compared to Q4 2014, but remains 3.8% below pre-economic downturn levels

• In Q1 2015, real household disposable income (RHDI) per head (excluding non-profit institutions serving households) was unchanged (0.0%) compared to Q4 2014 and increased 3.7% compared to the same quarter a year ago (Q1 2014). Overall, it remains broadly in line with the level of household income seen since 2012

• In the financial year ending 2014, median income (the income of the middle household if all households are ranked from the lowest income to the highest) was £24,500 – 3.4% higher than in 2012/13. This is a reversal of the downward trend seen since the finanical year ending 2008

• In Q1 2015, household spending per head grew 0.8% compared to the previous quarter – continuing the general upward trend that started in Q3 2011

• Great Britain has one of the highest mean levels of wealth relative to 18 OECD countries. Whilst shifting from mean to median net wealth leads to large differences in country rankings for some countries, suggesting higher wealth inequality, Great Britain ranks in a similar position on both measures

This release considers 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 well-being, as proposed in Economic Well-being: Framework and Indicators.

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

Real GDP per head

In Q1 2015, gross domestic product (GDP) per head, which adjusts GDP for the size of the population, increased 0.2% compared to Q4 2014. This was a slightly slower growth rate than the 0.4% quarterly increase seen in GDP, which recovered to its pre-economic downturn level in Q3 2013. Despite the quarterly growth, GDP per head remains 0.6% below its pre-economic downturn level.

Between 2013 and 2014, GDP per head increased 2.3%. This was slower than the 3.0% increase in GDP over the same period.

Real net national disposable income (NNDI) per head

In Q1 2015, NNDI per head increased 1.6% compared to Q4 2014. This was a faster growth rate than the 0.2% quarterly increase seen in GDP per head.

Between 2013 and 2014, NNDI per head increased 1.2%. This was slower than the 2.3% increase in GDP per head over the same period.

As discussed in the Economic well-being - Framework and Indicators article there are two main 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, UK 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, NNDI has behaved somewhat differently to GDP, particularly between late 2011 and late 2014. NNDI, which represents the income generated by production that is payable to UK residents, was broadly flat between Q1 2012 and Q4 2014. In Q1 2015, NNDI remained 3.8% below its pre-economic downturn level, this is compared to GDP per head which was 0.6% below its pre-economic downturn level in the same quarter.

The difference between the experience of GDP per head and NNDI per head since Q3 2011 can be explained by looking at the balance of primary incomes, which captures flows of income into and out of the UK economy.

One main part of primary incomes is direct investment; that is, earnings from investments in which an investor owns 10% or more of the ordinary shares or voting power in an incorporated enterprise, or an equivalent ownership in an unincorporated enterprise.

Since late 2011, there has been a fall in the net earnings of foreign direct investment (FDI) (the difference between earnings from direct investment abroad and from foreign direct investment in the UK). This fall can be attributed to both subdued earnings for UK residents’ from investment abroad and an increase in foreign earnings on direct investment in the UK.

Perception of the economic situation

The Eurobarometer Consumer survey asks respondents how they think the general economic situation has changed over the last 12 months. In March 2015, the aggregate balance stood at 3.2, the first positive balance since 1998. The small positive balance suggests that on average, respondents think the economic situation has slightly improved compared to a year ago, although in general it is broadly similar. The figure is an improvement on the negative 4.0 figure recorded at the end of the last quarter of 2014. The first quarter of 2015 saw slight improvements in people’s perceptions of the general economic situation. At its lowest, in May 2009, the Eurobarometer reported an aggregate balance of negative 82.3.

Notes for whole economy production and income

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

In Q1 2015, real household disposable income (RHDI) per head (excluding non-profit institutions serving households) increased 3.7% compared to the same quarter a year ago (Q1 2014). In Q1 2015 RHDI per head (excluding NPISH) was unchanged (0.0%) compared to Q4 2014. For 2014, as a whole, RHDI per head (excluding NPISH) was broadly unchanged, up 0.3% compared to 2013. Overall, in Q1 2015 RHDI per head (excluding NPISH) was 2.5% above its pre-economic downturn level.

In previous releases, we considered RHDI per head of the household and non-profit institutions serving households (NPISH) sector. In March 2015, we published initial estimates of the real disposable income of households only. We consider this a better indicator of the economic well-being of households. Real household and NPISH disposable income per head will continue to be published alongside RHDI per head (excluding NPISH) in this release.

Real household and NPISH disposable income per head increased 3.9% in Q1 2015 compared to the same quarter a year ago (Q1 2014). For 2014 as a whole, real household and NPISH disposable income per head increased 0.2%.

As Gross Domestic Product (GDP) began to fall in mid-2008, RHDI (excluding NPISH) per head remained fairly buoyant. By Q2 2009, RHDI (excluding NPISH) per head was 3.8% above its pre-economic downturn 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. Following this, until late 2014, real household income per head has remained broadly flat. In Q1 2015 RHDI per head (excluding NPISH) increased 3.7% compared to the same quarter a year ago and overall, by Q1 2015, RHDI (excluding NPISH) was 2.5% above its pre-economic downturn levels.

For international comparisons it is important to consider benefits in kind. The real household and non-profit institutions serving households (NPISH) adjusted disposable income per head series, which makes the adjustment for benefits in kind, can be found in the reference table.

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 that, on average, respondents reported their financial situation got worse, a positive balance means they reported it improved and a zero balance indicates no change.

Between the end of Q4 2014 and the end of Q1 2015, the aggregate balance improved from negative 5.2 to negative 1.7. 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 Consumer survey also asks respondents their views on whether now is a good time to save. Between the end of Q4 2014 and the end of Q1 2015, the balance improved from negative 6.6 to negative 3.3. The balance has been negative since March 2011 and despite improving from May 2013 onwards, the series remains negative; suggesting that respondents continue to believe now is not a good time to save. Despite this view, on average, households reported saving at least some of their income.

Additionally, Understanding Society² 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 the financial year 2012 to 2013 (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 downward 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%, this is 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 income

In 2013/14, median income (the income of the middle household if all households are ranked from the lowest income to the highest) was £24,500 – 3.4% higher than in 2012/13. This is a reversal of the downward trend seen since 2007/08.

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, it is also important to consider how income is distributed around the middle, considering the equality of the income distribution. One indicator is the ratio of total income received by the richest fifth of households to that received by the poorest fifth (other indicators are available). If the ratio gets larger then it implies increasing inequality between the top fifth and bottom fifth of households.

Between 2012/13 and 2013/14, this ratio saw a small decrease from 5.33 to 5.27 – suggesting a small decrease in income inequality. The decrease in this ratio was a result of the income of the richest fifth declining more than the income of the poorest fifth, at negative 1.6% and negative 0.5% respectively. However, as shown in Figure 3, overall movements in the ratio over the last 10 years have been relatively small when compared to earlier periods.

Notes for household income

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

2. Understanding Society is an academic study that captures information from a representative UK sample. More information in background note 6.

3. Real Household Disposable Income (RHDI) is published in both non-seasonally adjusted (NSA) and seasonally adjusted (SA) formats in the UK Economic Accounts, with the latter removing seasonal effects to allow comparisons over time. However, it is sensitive to short-term changes in its components, particularly on a quarterly basis, meaning that quarter on quarter movements can appear volatile. To better present the longer term movement in household income, this bulletin presents RHDI growth on a quarter on the same quarter a year ago and annual basis.

4. 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.

5. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

6. Throughout this release, financial years are written as 2011/12, for example. This refers to the financial year ending 2012. This convention is applied for all years.

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 Q1 2015, 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 1.6% below its pre-economic downturn level. This is despite real household incomes per head being 2.5% above their pre-economic downturn levels.

Since Q2 2011, real household spending per head has steadily increased. This could reflect improved economic sentiment among households. In 2014 overall, the pace of growth in real household spending per head has picked up, increasing 1.8% compared to 2013. This was higher than the 1.0% growth seen between 2012 and 2013. There was also an increase in the growth rate in Q1 2015 compared to the rate posted in Q4 2014, suggesting this trend is continuing.

As with household income, for international comparisons it is important to consider benefits in kind. Real household and non-profit institutions serving households (NPISH) actual final consumption per head, which makes the adjustment for benefits in kind, can be found in the reference table.

Notes for household spending

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

This section considers 2 different measures of wealth; net worth from the National Accounts and household wealth from the Wealth and Assets Survey (WAS).

Total net worth

In 2013, the net worth of the economy as a whole (of households, businesses and the government) increased 4.4%, to £7.6 trillion. Total net worth 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 worth of financial corporations, which increased by £421 billion (373%). This increase was somewhat offset by non-financial corporations, where worth decreased between 2012 and 2013.

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

The net worth 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 considered¹.

Figure 5 shows total net worth between 2004 and 2013 for the whole economy, and 3 of the sectors: households, financial and non-financial corporations. Between 2004 and 2007, total net worth increased year-on-year, mainly attributable to an increase in household non-financial assets. Net worth then fell in 2008 and 2009, before increasing again following the economic downturn.

Household net worth

Contributing to the increase in total worth, in 2013 household net worth increased 2.6%. As with total worth, this measure has not been adjusted for inflation, and therefore some of the increase in worth could be a result of an increase in price levels. Household net worth considers households financial position and includes non-financial assets such as houses². Figure 6 shows the household net worth position by type of asset between 2004 and 2013.

The main contributing factor behind the 2.6% increase in household net worth 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 the December 2014 Economic Well-being Bulletin, median household wealth, as measured by the Wealth and Assets Survey (WAS) was presented. Estimates from WAS are updated every 2 years, therefore different measures demonstrating the distribution of wealth will be presented at this point in each quarterly bulletin.

The Organisation for Economic Co-operation and Development (OECD) has recently developed a new database on the distribution of household wealth, based on the set of conventions and classifications proposed in the 2013 OECD Guidelines³. Evidence from this database for 18 OECD countries⁴ highlights large differences in wealth holdings across OECD countries. Data for Great Britain are drawn from the Wealth and Assets Survey.

Figure 7 shows the average levels of household wealth. The highest mean levels of wealth are observed in Luxembourg, the United States, Canada, Australia, Great Britain and Spain, while the Slovak Republic, Finland, Greece, Norway and the Netherlands record the lowest levels. However, since wealth is highly skewed towards the top of the distribution in many countries, together with the fact that the accuracy of measurements for the top of the distribution varies considerably across countries, the net wealth of the median household may be a better comparative estimate. Shifting from mean to median net wealth leads to large differences in country ranking for the United States, Austria and Germany, suggesting higher wealth inequality in these countries. Great Britain ranks in a similar position on both measures.

We are releasing an article on 1 July 2015, titled “Measuring National Well-being: International Comparisons, 2015” which will consider further international comparisons.

Notes for wealth

1. These measures are currently under development as part of the Measuring National Well-being programme and will be included in future releases where relevant.

2. Here "net" is used to describe the net wealth position (assets minus liabilities), rather than making an adjustment for capital consumption.

3. 2013 OECD Guidelines.

4. LUX Luxembourg, USA United States of America, CAN Canada, AUS Australia, GBR Great Britain, ESP Spain, BEL Belgium, ITA Italy, AUT Austria, KOR South Korea, FRA France, DEU Germany, PRT Portugal, NLD Netherlands, NOR Norway, GRC Greece, FIN Finland, SVK Slovak Republic.

5. Other non-financial assets includes “Other buildings and structures”, “Machinery and equipment”, “Cultivated biological products”, “Intellectual property products”, “Inventories” and “Contracts, leases and licences”.

6. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

In the 3 months to March 2015 (Q1 2015), the unemployment rate was 5.5%, down 0.2 percentage points from the 3 months to December 2014 (Q4 2014). Although the headline rate of unemployment has fallen sharply over the past year, it remains above its pre-economic downturn 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).

Notes for unemployment

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

In March 2015 (the final month of Q1 2015), the rate of inflation as measured by the consumer prices index (CPI) was 0.0%, unchanged from February 2015 and down 0.3 percentage points from the 0.3% rate recorded in January 2015.

The rate of inflation in March 2015 was the joint lowest since records began, matching February’s rate. Since January 2008, inflation has twice peaked at 5.2% (in September 2008 and September 2011) but has fallen sharply since those highs, more recently partly due to lower oil prices. Falls in clothing and gas prices produced the largest downwards contributions in the latest quarter.

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.

Perceptions of inflation

It is important to consider not only inflation itself, but also individual’s perceptions of price trends. The Eurobarometer Consumer survey asked respondents how they thought consumer prices had developed over the past 12 months. Individual’s perceptions of price changes have mapped reasonably well to actual changes in price levels over the last year.

There has been a general downward trend since mid-2011 with the aggregate balance falling to 0.8 in March 2015, down from 15.8 in December 2014. A balance figure near zero implies that, on average, people perceive price changes to be similar to that of a year ago. This is in line with the inflation rate of 0.0% reported for the same period.

Notes for inflation

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).