Consumers in the Economy
Which? aims to empower consumers in a number of ways, especially via its policy and campaigning, provision of free consumer tools, and members’ publications and services. In order to do all those things effectively, it is vital that the organisation has a thorough understanding of the current consumer economy, as well as the associated underlying trends. This article is the first of two that set out our analysis of the consumer economy and is derived from a variety of socio-economic data sources. This first article will discuss the financial resources available to households, the second will cover how consumers use those resources, alongside their underlying attitudes and behaviours.
The time over which these trends are studied varies, to a large extent due to availability of data. In every case we used the longest time series possible to help put current trends into a broader context. This also helps bring into relief unusual trends that might not have been so prominent if the time series were shorter. Having used data from a number of different sources it has not been possible to be consistent in our use of time periods. In all analysis, we have used the most recent data available to us and have attempted to go as far back as possible.
The UK economy relies heavily on consumers: In 2016 consumers spent, on average, £100 billion per month, with consumer spending making up 63% of the country’s GDP. This spending, both in terms of level and composition, depends both on how much financial ‘resource’ households have available to them and on how willing they are to spend it. This balance changes depending on a number of different factors, some specific to the household (such as wage levels, unexpected expenses, saving behaviours, feeling financially secure) or to factors in the wider economy, such as government macroeconomic policy, employment levels, inflation etc.
We examined financial resources by splitting them into four main components: income, wealth, debt and savings. Housing gets a brief mention in the context of wealth, but will be explored in depth in a future piece.
 Consumer Trends, Office for National Statistics. Average monthly consumer expenditure (Current Price Value) for Quarters 1- 4, 2016.
 Which? analysis of ONS National Accounts data.
Stages of Income and Earnings
There are a number of distinct stages when discussing incomes and earnings.
Gross earnings are wages earned in exchange of a set amount of employment, while take-home pay are earnings with tax and national insurance contributions deducted.
Original income refers to gross earnings including any other income, for example income from investments, self-employment, pensions etc. When benefits are added to the original income this is referred to as gross income and after direct tax deduction (council tax, income tax, NI contributions etc.), this is called disposable or net income. The following discussion tends to refer to gross or disposable income.
When talking about household incomes, these are usually equivalised, that is, adjusted to take into account different households’ composition. This allows incomes between households to be comparable.
Disposable income has only just reached its pre-recession levels for working age households
Fluctuations in income growth can be seen throughout time, with income growth dropping in periods of recession, such as the early 1980s and early 1990s. In recent years and following the recession in 2007/08, disposable income growth has generally been slow despite the unemployment rate dropping to its lowest level since the 1970s. Overall, disposable incomes were dropping before 2012/13 and even though they have been recovering since, they have only just gone slightly above their pre-recession levels.
Overall disposable income growth hides some important differences between groups. If we look at retired and non-retired households separately, we see that retired households’ disposable income has been growing fairly steadily in the last few years and is now about 15% higher than it was in 2007/08, whereas working-age households’ disposable income has only just recovered to its pre-recession levels.
Many different types of households have seen their incomes stagnate
Incomes analysis from the Department for Work and Pensions shows that, for many types of household, incomes have only just returned to their 2007/08 levels. Couples with and without children and single person households with no children now have incomes that are at a similar level to those in 2007/08. Retired households have seen some growth, their incomes rising by 11% and they, together with single person households with children are the only two types of household, from the ones looked at, that have seen their income rise above its 2007/08 levels.
 Nowcasting household income in the UK: Financial year ending 2017 – Reference tables, Office for National Statistics.
 Department for Work and Pensions. (2017). Households Below Average Income, 2000/01-2015/16
Income and Wealth Inequality
Income inequality has recently fallen but it’s still higher than 40 years ago
Incomes are not distributed equally between households and the extent to which overall incomes are either concentrated among the highest earners or are more evenly shared across households has important implications for the way that money is used in the economy (i.e. spent, saved or invested).
In 2015/16, the richest 20% of households had a disposable income that was 5 times higher than that of the poorest 20%. This was greatly reduced from its height in the early 1990s, when the income of the richest households was over 6 times higher than that of the poorest. Current income inequality levels are still quite high by historical standards, however: In 1977 inequality was at much lower levels than today, with the richest households having 3.9 times higher income than the poorest.
The distribution of wealth is even more unequal than income
When looking at data from the latest wave of the Wealth and Assets Survey, which collects information not only on income but various other assets (described in more detail below), we found that although the median gross income for the highest grossing 10% (£107,000) was 13 times higher than the lowest 10% (£8,180), the difference in household wealth was much higher: In wave 4 of the Wealth and Assets Survey (2012-14, the most recent wave of the survey we have data for) the most wealthy 10% of the population had, on average, 325 times more wealth than the least wealthy 10% of the population.
 Equivalised disposable income: the total income of the household (after tax and other deductions) that is available for spending or saving, corrected for differences in household composition.
 The measure is called the quintile share ratio or the S80/S20 ratio and is the ratio of the total equivalised disposable income of the top 20% of the income distribution to the bottom 20%. The higher the ratio is, the higher the inequality.
What is wealth?
Total wealth, as measured by the Wealth and Assets Survey is the sum of the following four wealth components:
Property wealth is the market value of a household’s main property as well as all other properties the household may own. In this article we refer to property wealth as the value of property (or properties) minus any money owed on mortgages.
Physical wealth is made up of the value of all of a household’s possessions, such as appliances, furniture, cars, other vehicles, arts, collectibles, etc.
Financial wealth is comprised of all the money held in current and savings accounts, money kept at home, ISAs, stocks, shares minus any liabilities (such as debt or overdrafts, for instance). In this article we refer to the net financial wealth - that is, financial wealth excluding any liabilities (personal loans, credit card bills, overdrafts etc.).
Pension wealth is the value accrued in all but state pensions as well as any pensions that are currently paid.
The primary driver of household wealth varies, depending on levels of wealth
The wealthiest 30% of households’ assets are primarily comprised of their pension wealth and they have the highest levels of property wealth too. The 40% of households in the middle of the distribution have property wealth as their main asset. By contrast the least wealthy 30% of households have physical wealth as their main asset – their appliances, cars, furniture etc. The wealthiest of these households have small amounts of pension and property wealth but they are a minority. Some of the least wealthy households even have negative amounts of financial wealth.
Pensioners are the most wealthy of household types; single-parent families, the least
The data suggest that wealthiest households are likely to be ones with at least one person over pensionable age and no dependent children. This, in many ways, makes sense as by that age people would have normally been able to have paid off their mortgages and contributed as much pension as they possibly could. On the other hand, one parent families and single, working-age households are the least wealthy.
Housing is very much part of a household’s resources: it can frequently be a households’ most valuable asset as well as its most significant savings vehicle where significant levels of capital can be held. Owning a property can be seen as a long-term investment, and in the current market, for those that have necessary capital for mortgage deposits and favourable employment circumstances, can be better value than renting in terms of monthly spending.
House building rates have fallen significantly since the late 1970s
House building followed an upwards trend from the end of WWII, which peaked in the late 60s. House building efforts were shared between Local Authorities and the private sector. As Local Authority house building tailed off in the following decades and became almost negligible after the late 80s, the private sector (as well as Housing Associations), did not pick up their pace. We are now in one of the lowest house building periods of the last 65 years, while at the same time the population of the UK continues to grow.
Owner occupation has historically been the most common tenure type in England, although it has been waning since 2005. At the same time, the percentage of tenures privately rented has nearly doubled since 2000.
In 2015/16, 63% of dwellings were owner occupied, 20% were privately rented and 17% social rented. This equates roughly to 14.3m owner occupied, 4.5m private rented and 3.9m social rented households.
Home ownership is decreasing in younger age groups
Home ownership has seen a big decline in younger age groups. While in 1981, 32% of 16-24 year olds owned their own homes, by 2015/16, this had dropped to only 10%. Conversely where in 1981 half of those aged 65-74 were owner occupiers, by 2015/16 this had risen to 78%.
 Zoopla analysis of their own data [https://www.zoopla.co.uk/discover/property-news/cheaper-to-rent-than-buy-in-over-half-of-british-cities/#FyEhA0uk64CDF1Zm.97]
 English Housing Survey Headline Report 2015/16
Looking at the UK economy, the value of financial liabilities has risen and so has the value of assets
There has been a consistent rise in the value of financial liabilities in the UK economy over the last 30 years. In 2015, the economy-wide value of financial liabilities amounted to £26,799 per person, compared to the £93,132 value of financial assets. Both the value of financial liabilities and particularly the value of assets have risen quite steeply over the last 30 years. Assets were 3.5 higher than liabilities in 2015, a bit higher than in 1987, when assets were 3.1 times higher than liabilities.
However, changes in the economy may have an adverse effect on household finances
This can make current borrowing appear to be business-as-usual but there is a significant difference: In 1987, incomes were almost the same as financial liabilities whereas by 2015, financial liabilites were 64% higher than incomes. In addition, the rise in assets is driven by products that are cannot be accessed easily – pension schemes, for instance. This indicates that households could be sensitive to even minor changes in the economy, such as an increase in interest rates because, although the value of their assets is much higher, their composition is such that households are unlikely to be able to liquidate them quickly or without significant barriers.
This view is compounded by data on outstanding consumer borrowing rising – it is now approaching similar levels to 2008.
Households borrow mostly using credit and charge cards, although (excluding student loans) much higher debts accrue on hire purchase
Households borrow money in different ways, with most borrowing through credit or charge cards. According to the Wealth and Assets Survey, in the period between 2012 – 2014 (the most recent period we have data for), nearly a quarter of households (23%) had credit or charge card debt, 16% had overdrafts and 14% hire purchase loans.
Hire purchase loans had the highest value – 50% of households with such loans owed £2,900 or more. The median value for credit or charge cards loan was £1,700 and for overdrafts it was £500.
Overall, in 2012 – 2014, 46% of households had some type of borrowing, worth, on average, £5,500 per household.
Less wealthy households tend to perceive their debt as a much higher burden
Debt is unlikely to have the same impact across households with different incomes and wealth. In order to find out the impact that debt has on households, the Wealth and Assets Survey asks how much of a burden debt is.
Although the answer, as expected, was that less wealthy households feel the impact of debt more heavily, it is remarkable how stark the differences between the least and most wealthy households were. When looking at households with financial liabilities (i.e. households with some debt), 40% of the least wealthy households said that their debt was a heavy burden, compared to only 3% of the wealthiest households. Conversely, 82% of the wealthiest households said that their debt was not a problem at all, compared to 28% of the least wealthy households. To put this in further context, 13% of the least wealthy households had some form of financial liability, compared to 7% of the most wealthy.
 ONS National Accounts Households and NPISH 6.1.9
 Wealth and Assets Survey, Wave 4 (2012 – 2014); ONS
One of the measures that tries to summarise the financial position of households in the economy is the saving ratio. ONS National Accounts measure it as the percentage of income that remains after all expenditure has been taken into account (and, in principle, can be saved).
It follows then, that the saving ratio (the proportion of money that can be saved) rises if either expenditure falls and incomes remain the same, or if incomes rise faster than expenditure. Conversely, the saving ratio falls if expenditure rises and incomes remain the same or if expenditure rises faster than incomes.
With consumer spending making up such a large proportion of the economy, mainstream economic theory would expect to see a high savings ratio either in or immediately following periods of economic contraction, and a low savings ratio as a possible warning indicator of a lack of resilience to economic shock.
Savings, in the economy overall, have recently fallen to an all-time low
The proportion of income in the economy that has not been spent has historically fluctuated from around 4% to over 15%. Leading up to the most recent recession, the saving ratio fell from around 12% to around 7%, between 2001 and 2008.
Since 2010 the savings ratio has again been falling steeply. In the first quarter of 2017 it was 3.8, the lowest level recorded since the second quarter of 1964, when it stood at 3.6. This drop, coupled with incomes that have stayed broadly the same over the last nine years, suggests that the money available to be saved has been reducing. In other words, there has been a relatively constant amount of household income, an increasing proportion of which has been spent, to the detriment of saving.
Many households may be vulnerable to sudden changes in the economy
This is partly corroborated by survey data. Wave 4 of the ONS Wealth and Assets Survey (2012-2014) found that the mean saving per head was £23,000. This may sound high, but the distribution was highly unequal. Median household savings (i.e. the value in the middle of the distribution) was just £2,500, and 30% of households had less than £1 in savings accounts or ISAs.
This article examined the long term trends in the financial resources that households have available to them. We looked in turn at the main household financial resources: income, wealth, debt and savings.
We found that non-retired household incomes have only just reached their pre-2008 levels, with many having seen their incomes drop in real terms. Employment rates are at an all-time high, but most have less money coming in now than they did at the start of the noughties.
Inequality in income, despite recent improvements, continues to be high and inequality of wealth is even higher. The poorest households have no other wealth than the contents of their houses, while the wealthiest have accrued wealth both on their properties and their pensions. The wealthiest households have become wealthier over the last decade or so, while the least wealthy ones have seen their wealth remain largely unchanged.
Borrowing is higher relative to income than it used to be. Incomes in 1987 were 4.5 times higher than financial liabilities; this gap has closed significantly, with incomes standing at just 1.7 times the per-capita value of financial liabilities in 2015.
At the economy wide level, the amount of money saved in the economy is high, but the distribution of that money appears to be highly uneven with nearly one in three households holding just £1 or less in a savings account or ISA.
This analysis points towards a number of UK consumers being precariously poised in the current UK economy. Incomes are flat, debts high, a substantial minority have little or no savings, wealth is highly unequally distributed, and as we will explore further in the next article consumer spending has been and remains high. There appears to be little headroom for many consumers to withstand any significant economic shocks or worsening household financial circumstances.
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