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A dash of data: Spotlight on Irish households

18 May 2017
by Guest author

Esther Bolton, OECD Statistics Directorate

GDP growth always gets a lot of attention, but when it comes to determining how people are doing it’s interesting to look at other indicators that focus more on the actual material conditions of households. Let’s focus on a few alternative indicators to see how households in Ireland are doing.

GDP and household income

Real household disposable income per capita grew at the same pace as real GDP per capita in Q4 2016, both increasing 2.3% from the previous quarter. However, that does not mean that real GDP and real household income always grew in tandem as shown in chart 1. Real household income levels in Ireland only recently returned to their pre-crisis level (the index was 103.5 in Q4 2016 from a baseline value of 100 in Q1 2007 before the economic crisis), following more than 7 years below that level. On the other hand, real GDP per capita is up more than 27% since Q1 2007 (the index was 127.3 in Q4 2016) due to the remarkable growth rate seen in Ireland in Q1 2015.

What occurred in Ireland in 2015 reflects the growing importance of global value chains, combined with the increasing importance of “intangible assets” used in production, as multinational enterprises (MNEs), in particular, have sought to maximise profits and minimise costs, including through optimisation of their global tax burden, by (re)allocating some of their economic activities in different parts of the world. In 2015, MNEs relocated intangible assets to Ireland, where these assets are being used by Irish enterprises (including Irish affiliates of foreign MNEs) to generate value added.

This is an excellent example of why GDP should not be interpreted as an indicator of the purchasing power or the material well-being of a country. GDP is primarily a gross measure of economic activities on the economic territory of a country, and of the income generated through those activities. High levels of GDP thus do not necessarily mean high levels of income flowing to the residents nor does it mean that their growth rates will be similar(read this post for an explanation on Irish GDP large increase in 2015). A major reason is that some of the income generated by production may be repatriated to non-residents, for example in the case of income generated by affiliates of multinational enterprises.

The divergence between GDP and household disposable income can clearly be seen in Chart 1 with real GDP per capita growing sharply (by 21.3% in Q1 2015 from the previous quarter), while real household income increased by only 1.6%.

Chart 1

The presence of a significant number of foreign affiliates of MNEs (responsible for around half of Ireland’s business sector GDP, that is to say, excluding agriculture, most self-employment, the public sector and some financial services activity) is not the only reason why there can be a divergence between the growth of household income and GDP. Government interventions can also play a role.

As GDP was contracting throughout the quarters of 2008, household income was sustained by increased unemployment benefits and other social benefits received by households. As a result, between Q1 2008 and Q4 2008, the net cash transfers to households’ ratio showed a sharp increase; see Chart 2. Since Q4 2010 the ratio has trended down.

Chart 2

 

 

Confidence, consumption and savings

Household disposable income is a meaningful way to assess material living standards, but to get a fuller picture of household material well-being one may also want to look at households’ consumption behaviour.

Consumer confidence (chart 3) trended upward, from a low seen in Q1 2009, until Q4 2015 when it reached its peak (104.7). Since then it has been declining to 103.0 in Q4 2016, yet still 10 points higher than Q1 2009.

Chart 3

Despite the recent downward trend in consumer confidence, the increase in household income helped boost real household consumption expenditure per capita (chart 4), which rose 0.5% in Q4 2016 from the previous quarter (from 95.7 in Q3 2016 to 96.2 in Q4 2016). Since Q1 2013 real household consumption expenditure per capita has increased in line with developments in real household income. However, Irish households are still buying less goods and services than before the crisis.

Chart 4

Because household income increased more than final consumption expenditure, the households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, increased 1.2 percentage points to 13.5% in Q4 2016. The ratio has been trending up since Q1 2016, suggesting that households remain cautious about their future income.

Chart 5

 

Debt and net worth

The households’ indebtedness ratio, i.e. the total outstanding debt of households as a percentage of their disposable income, may reflect (changes in) financial vulnerabilities of the household sector and provides a useful yardstick to assess their debt sustainability.

The household indebtedness ratio dropped considerably since the crisis, by nearly 75 percentage points, from its highest point in Q4 2009 (230% of disposable income, compared with 155 % of disposable income in Q4 2016). This corresponds to the largest drop in the debt ratio seen amongst OECD countries. The decline was driven by a decrease in loans (primarily mortgages) and rising household income.

Chart 6

When assessing households’ economic vulnerabilities, one should also look at the availability of assets, preferably taking into account both financial assets (saving deposits, shares, etc.) and non-financial assets (for households, predominantly dwellings). Because information on households’ non-financial assets is generally not available, financial net worth (i.e. the excess of financial assets over liabilities) is used as an indicator of the financial vulnerability of households.

In Q4 2016, households’ financial net worth was stable at 214 % of disposable income (chart 7). Since Q1 2009, it has been trending up driven primarily by the reduction in household debt (as seen in chart 6) and increasing financial assets (mainly pension assets and currency and deposits). Between 2009 and 2016, household financial net worth increased by around 145 percentage points. However, some caution is needed interpreting this figure since financial net worth does not take into account housing assets which saw spectacular growth due to a bubble in house prices until it burst in 2007 followed by sharp declines afterwards.

Chart 7

 

Unemployment

The unemployment rate and the labour underutilisation rate (chart 8) also provide indications of potential vulnerabilities of the household sector. More generally, unemployment has a major impact on people’s well-being. The unemployment rate was 7.1% in Q4 2016, pursuing the downward trend observed since Q1 2012 when it reached a peak of 15.1%. The labour underutilisation rate takes into account the share of underemployed workers and discouraged job seekers. Since Q4 2015, this rate has been twice the size of the unemployment rate, compared with around one and half time pre-crisis, indicating higher slack in the labour market.

Chart 8

Overall, the last quarter of 2016 saw a continued increase in Irish households’ material wellbeing with income and consumption per capita continuing to expand, a further decline in debt, an increase in financial net worth (although total net worth still remains below its pre-crisis level ) and a fall in the unemployment rate. However, the savings rate increased in line with declining consumer confidence (although consumer confidence is now much higher than its pre-crisis level). And despite the continued fall in the unemployment rate, many workers would prefer to work more, as indicated by the remaining high level of the underemployment rate.

One should keep in mind that households’ income, consumption and savings may differ considerably across various groups of households; the same holds for households’ indebtedness and (financial) net worth. The OECD is working on these distributional aspects and preliminary results can be found here and here.

To fully grasp people’s overall well-being, one should go beyond material conditions, and also look at a range of other dimensions of what shapes people’s lives, as is done in the OECD Better Life Initiative.

 

Useful links

Are the Irish 26.3% better off?”, OECD Insights post, 5 October 2016

For many years, OECD has been focusing on people’s well-being and societal progress. To learn more on OECD’s work on measuring well-being, visit the Better Life Initiative.

Interested in how households are doing in other OECD countries? Visit our household’s economic well-being dashboard.

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