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The Economic Position of Households, Q1 2012

Released: 31 July 2012 Download PDF

Abstract

The economic position of household is part of the Measuring National Well-being Programme and was previously published in Q4 2011 as the Quarterly Household Release. This publication focuses on household actual income and expenditure, which are measures that take account of in kind services provided by the state, such as healthcare and education. It is important to consider household actual income and expenditure as these in kind benefits have implications for well-being and they vary from one country to another and over time. The release also considers household balance sheets, which act as an important indicator of the sustainability of households’ financial positions.

Key points

  • Real household actual income per head fell by 0.6 per cent in the first quarter of 2012 compared with the fourth quarter of 2011, to its lowest level since the second quarter of 2005.

  • Real household actual expenditure per head fell by 0.2 per cent in the first quarter of 2012 compared with the fourth quarter of 2011, to its second lowest level since the third quarter of 2003.

  • The household saving ratio fell by 0.5 percentage points to 6.4 per cent in the first quarter of 2012. Gross household saving was £17,000 million in the same quarter, down from £18,300 million in the fourth quarter of 2011.

  • After the financial crisis of 2008, households’ residential wealth fell due to falling house prices and an increased number of repossessions. 

Real household actual income and expenditure

In the first quarter of 2012, real household actual income per head, taking account of inflation, fell by 0.6 per cent quarter on quarter. Real household actual income per head stood at its lowest level since the second quarter of 2005. This was primarily due to prices going up at an increasing rate over most of the period; the exception being in 2009, when prices fell after the 2008 financial crisis (see Figure 3).

The increase in prices eroded the growth of household incomes. Furthermore, the growth of actual household incomes on a current price basis weakened over the period. Finally, sustained population growth led to incomes being spread across a greater number of people, and therefore further reduced the growth of actual income per head over the period.

The fall in real household actual income seen in the latest quarter was slightly smaller than the fall in real households’ disposable income per head (which fell by 1.0 per cent), the measure that excludes in kind services provided by the state. Therefore the in kind services reduced the fall in actual households’ incomes.

This reflects a longer term effect, whereby in kind services have acted to reduce the recent falls in households’ incomes. For example, whilst the latest level of real household actual income per head was the lowest since the second quarter of 2005, for households’ disposable income per head the level was the lowest since the third quarter of 2003 (Figure 1).

Figure 1: Real households' disposable income and actual income per head (constant prices)

Chart showing the quarterly level of real household income and actual income per head for the UK
Source: Office for National Statistics

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In the first quarter of 2012, household actual expenditure per head, taking account of inflation, fell by 0.2 per cent when compared with the previous quarter. Household actual expenditure per head was at its second lowest level since the first quarter of 2004 (the lowest level was in the third quarter of 2011). As with real actual income per head, inflation and continuing population growth contributed to the historic low.

Household expenditure per head (not including in kind services provided by the state) fell by 0.3 per cent into the most recent quarter. As with household incomes, in kind services have tended to reduce the recent falls in households’ expenditures. Between the fourth quarter of 2007 (when both series were at record levels) and the latest period, households’ expenditures per head fell by 6.4 per cent including in kind services and 8.6 per cent excluding them.

Figure 2: Household expenditure and actual expenditure per head (chained volume measures)

Chart showing the quarterly level of household expenditure and actual expenditure per head (chained volume measures) for the United Kingdom
Source: Office for National Statistics

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Figure 3: Annual growth in prices and household actual income and expenditure in current prices (CP)

Chart showing the annual growth in prices and household actual income and expenditure in current prices for the United Kingdom
Source: Office for National Statistics

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The analysis above takes account of the impact of inflation, however, in the following sections the impact of inflation is not accounted for. This approach allows for the investigation of the component series that make up household actual income and expenditure, respectively.

Household actual income

Without taking account of inflation, the quarterly growth of household actual income was 0.2 per cent in the first quarter of 2012, the same level of growth seen in the previous quarter. In the latest quarter the main drivers of growth were increased payments of social benefits (contributing 0.6 per cent to the overall growth), and lower levels of taxes and social contributions (contributing 0.6 per cent). Relatively small growth in wages and salaries meant that it only contributed 0.1 per cent to the overall growth. This growth was offset by falling sole trader income and housing services (contributing -0.6 per cent), and capital income (contributing -0.4 per cent).

Table 1: Contributions to growth in household actual income (current prices)

United Kingdom

Percentages
Contribution to growth Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1  2012
Wages and salaries  0.6 0.1 0.3 0.4 0.3 0.4 0.4 0.1
Sole trader income and housing services 0.5 0.2 0.4 0.3 0.2 0.2 0.2 -0.6
Capital Income -1.0 1.4 -0.3 0.6 0.0 -0.4 0.0 -0.4
Social Benefits  0.5 0.3 0.3 0.2 0.2 0.3 0.3 0.6
Taxes and Social Contributions 0.3 -0.8 -0.2 -0.6 0.3 0.4 -0.7 0.6
Other 0.1 0.1 -0.1 -0.4 0.3 0.1 -0.1 -0.1
Total Growth 1.0 1.4 0.3 0.4 1.3 1.1 0.2 0.2

Table source: Office for National Statistics

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.

Household actual expenditure

Without taking account of inflation, in the first quarter of 2012 the quarterly growth of household actual expenditure was 0.8 per cent, down from 1.4 per cent growth in the previous quarter. The growth in the latest quarter was driven by growth in expenditure on social benefits in kind (contributing 0.4 per cent to the overall growth), housing including energy (contributing 0.3 per cent) and food and non alcoholic beverages (contributing 0.1 per cent). Durable goods, net tourism and other goods and services made no contributions to the overall growth.

Table 2: Contributions to growth in household actual expenditure (current prices)

United Kingdom

Percentages
Contribution to growth Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1  2012
Social Benefits In Kind 0.2 0.1 0.2 0.2 -0.4 0.2 0.3 0.4
Expenditure of NPISH 0.1 0.1 0.0 0.0 0.1 0.0 0.0 0.0
Food and non-alcoholic beverages 0.2 0.0 -0.1 0.2 -0.1 0.1 0.0 0.1
Other goods and services 1.2 0.6 0.0 0.8 0.3 -0.3 0.8 0.0
Housing including Energy 0.5 -0.3 1.3 0.1 0.0 0.2 0.2 0.3
Durable goods (cars, appliances, etc) 0.0 -0.1 0.1 -0.2 -0.1 0.1 0.0 0.0
Net tourism -0.2 0.2 -0.3 0.1 -0.1 0.0 0.0 0.0
Total Growth 2.0 0.5 1.2 1.2 -0.3 0.3 1.4 0.8

Table source: Office for National Statistics

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The household saving ratio

The household saving ratio is the amount of saving that households make in relation to its available resources.

In the first quarter of 2012 the saving ratio was 6.4 per cent, a fall of 0.5 percentage points on its previous value. This fall was driven by the fall in households’ total resources (-0.1 per cent), combined with the increase in final consumption (0.5 per cent), over the period. Gross saving was 17.0 billion in 2012 Q1, the lowest amount since 2011 Q1.

Figure 4: The household saving ratio

Chart showing the quarterly household saving ratio for the United Kingdom
Source: Office for National Statistics

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Household financial balance sheets

In the first quarter of 2012, households’ financial assets relative to income continued to increase, following an increase in the previous quarter. This measure includes all financial assets of households; however, it does not include any physical assets, such as property. The movement in the latest quarter was driven by a greater increase in household assets relative to the increase in income. The ratio of households’ financial assets relative to income has remained at roughly the same level since mid 2009.

In the first quarter of 2012, total financial liabilities relative to income was almost unchanged, falling only marginally. The major financial liabilities for households are mortgages. Therefore, the continued slow downward trend in financial liabilities relative to income could reflect movements in the housing market over the period, and households paying down debt as a proportion of income following the financial crisis. The relationship between the housing market and household wealth is considered in the Focus on... section.

In line with increased financial assets and stable financial liabilities, net financial assets - the difference between financial assets and financial liabilities - also rose in the first quarter of 2012.

Figure 5a: Household financial liabilities relative to income

Chart showing household financial liabilities relative to income for the United Kingdom
Source: Office for National Statistics

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Figure 5b: Household financial assets relative to income

Chart showing household financial assets relative to income for the United Kingdom
Source: Office for National Statistics

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Figure 5c: Households' net financial assets/liabilities relative to income

Chart showing households' net financial assets and liabilities relative to income for the United Kingdom
Source: Office for National Statistics

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Focus on….Household Sector Balance Sheets

The household sector balance sheet records the stock of households’ assets and liabilities at the end of each year. The balance records the net wealth of the household sector, that is, assets net of liabilities. Wealth is an important economic indicator as it can be used to fund future consumption, and therefore when looked at alongside income and spending it gives a more complete picture of the position of households.

The 2008 recession had a significant impact of the balance sheets of the household sector, particularly through falling house prices and stock markets.  In 2009 and 2010 household balance sheets began to recover, growing by similar rates to those pre-recession.  In 2011, the strength of the recovery weakened, with growth in total net wealth of 0.1 per cent between 2010 and 2011.

Figure 6 shows the changes in the stock of net household wealth split between its main components; residential wealth, other non-financial assets, and net financial assets, between 1997 and 2011. The stocks of assets and liabilities can change due to flows (changes to savings, or the purchase/sale of assets) and also because of changes in the valuation of existing stocks of assets.

Figure 6: Household Sector Balance Sheet (current prices)

Chart showing the household sector balance sheet by net financial assets, residential wealth and other non-financial assets for the United Kingdom
Source: Office for National Statistics

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Prior to the onset of the recession in 2008, households’ balance sheets grew strongly, driven in part by the accumulation of net financial assets, but more notably because of the rise in residential wealth in line with rising house prices. However, the onset of the financial crisis in 2008 saw this growth falter, with the value of the household balance sheet falling 12.4 per cent between 2007 and 2008 to £5,966.7 billion.

The household sector balance sheet grew in 2009 and 2010, at a similar rate to the growth before the recession. However, in 2011 the growth slowed, with households’ balance sheets expanding by just 0.1 per cent (or by £10.3bn) between the end of 2010 and the end of 2011.

The fall of households’ balance sheets in 2008 was caused by falling financial wealth combined with falling residential wealth. Financial wealth includes the value of all stocks, shares and savings, net of any debt attributed to households, the largest of which is mortgages. In line with movements in the stock market, net financial assets increased before the recession and fell considerably in 2008. Following this, as the stock markets stabilised, households’ net financial assets grew strongly in 2009 recovering all of the value lost in 2008. In 2011 total net financial assets of households fell slightly despite a small increase in gross saving, due in part to a drop in equity values over the period.

In addition to the impact on financial assets, the financial crisis in 2008 and the subsequent recession also had an impact on the residential wealth of households, which is the value of all houses owned by the household sector. House prices are an important determinant of residential wealth and before the financial crisis growth in house prices was accompanied by growth in residential wealth (Figure 7).

Figure 7: Residential wealth (current prices) and house prices

Chart comparing total residential and the ONS House Price Index for the United Kingdom
Source: Office for National Statistics

Notes:

  1. House Price Index is the ONS Mixed Adjusted House Price Index (2002 Q1 = 100)

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However, as the financial crisis hit in 2008, residential wealth fell at a faster rate than house prices. This can be explained by the change in the number of houses owned by the household sector. Given the roots of the financial crisis, this was likely because of the reduction in new mortgage lending and an increase in the number of house repossessions. When taken together, these two factors reduced the number of houses owned by the household sector, because repossessed homes form part of the balance sheets of firms and in particular, financial corporations. Data from the Department for Communities and Local Government shows that the total number of mortgages peaked in 2007 and has fallen since, and repossessions reached a peak in 2009.

As the constraints on mortgage lending eased and repossessions slowed, the residential wealth of households began to grow again in 2009 and 2010. However, in line with falling house prices, growth in the total value of residential wealth also slowed in 2011, and as a result the level remains just below its pre-recession peak. 

Other non-financial wealth includes assets such as vehicles (including cars), agricultural assets and commercial buildings. As with other types of wealth, the value of other non-financial assets also fell during the 2008 recession, particularly transport equipment and non-residential buildings. Growth in non-financial assets returned in 2009 and in 2010, non-financial assets surpassed its pre-recession peak.

Background notes

  1. Components of Household Actual Income and Expenditure

    Household Actual Income

    Component National Accounts Definition
    Wages and salaries D11. wages and salaries
    Sole trader income and housing services B2G and B3G. gross operating surplus of households including gross mixed income
    Capital income D4 Net. property income
    Social benefits D62 net. social benefits and D63 net. social benefits in kind
    Taxes and social contributions D612. Received imputed social contributions, D5 paid. taxes on income and other current taxes, D6112 paid. employee social contributions and D6113 paid.  social contributions by self- and non-employed.
    Other D7 Net other current transfers.

    Table source: Office for National Statistics

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    Household Actual Expenditure

    Component National Accounts Definition
    Durable goods Total durable goods
    Housing including energy COICOP 04 (energy includes water, electricity, gas and other fuel)
    Food and non-alcoholic beverages COICOP 01
    Other goods and services All goods and services excluding durable goods, COICOP 01 and COICOP 04.
    Social benefits in kind D63. net social benefits in kind
    Expenditure of non-profit institutions serving households P31. Expenditure of NPISH

    Table source: Office for National Statistics

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  2. Non profit institutions serving households (NPISH)

    All estimates presented are for the combined Household and NPISH sectors. NPISH sector institutions comprise any non-profit organisation where the majority of its funds come from households, of which the largest industries include charities, universities, religious organisations and trades union.

  3. Chained volume measures (CVM)

    Chained volume measures allow users to identify changes in expenditure on a good (or service) resulting from a change in the quantity purchased, rather than a change in the price of that good (or service). More information on annual chain-linking can be found in the article Methodology Note: annual chain-linking (58 Kb Pdf) .

  4. National Accounts Revisions Policy

    The data in this release are consistent with the United Kingdom Economic Accounts – Q1 2012, and are subject to revisions following the ONS National Accounts Revision policy. The policy may be found on the National Statistics website.

    Estimates for the most recent quarter are provisional and, as usual, are subject to revision in light of updated source information.

  5. Next publication: 15 October 2012 (provisional date)

    Issued by: Office for National Statistics, Government Buildings, Cardiff Road, Newport, NP10 8XG

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