Jennifer Ribarsky, OECD Statistics Directorate
Tableau de bord de données : le point sur les ménages français (article in French)
Economic growth (GDP) 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 see how households in France are doing by looking at a few indicators.
GDP and Household Income
Chart 1 shows how much seasonally adjusted GDP and household income have grown since the first quarter of 2007, before the start of the economic crisis, with this period representing the baseline value 100. For the most recent quarter, Q1 2015, GDP per capita, which adjusts GDP for the size of the population, increased 0.6% from the previous quarter. The index increased from 99.5 in Q4 2014 (just below the 2007 baseline) to 100.1 in Q1 2015, so only returning to the pre-crisis level of real GDP after more than 6 years below that level. Real household disposable income per capita increased strongly in Q1 2015, by 1.2%. The index increased from 101.1 in Q4 2014 to 102.3 in Q1 2015, and has remained close to or above the baseline since the beginning of the crisis).
The increase in households’ purchasing power in Q1 2015 was mainly driven by increases in compensation of employees and a fall in taxes paid by households. The drop in taxes and the slight drop in social contributions paid in particular by the self-employed as a result of the Responsibility and Solidarity Pact were accompanied by a slight increase in social benefits; as a consequence, net cash transfers to households (chart 2) played a role by increasing disposable income at a faster rate than primary income.
Also, chart 2 clearly shows that households’ material conditions in France were sustained during the economic crisis through the redistribution process. The net cash transfers to households ratio started increasing during the depths of the economic crisis (the ratio peaked in Q3 2009 at 92.0) and the real household disposable income began to diverge from the pattern exhibited by economic growth, as shown in chart 1.
Confidence, Consumption, and Savings
Household disposable income is a meaningful way to assess material living standards, but to get a fuller picture of household economic well-being it is interesting to look also at households’ consumption behaviour. Chart 3 shows that consumer confidence ticked-up in Q1 2015 (the index increased from 99.3 in Q4 2014 to 99.7 in Q1 2015) suggesting that consumers are now more confident about their economic situation. This confidence helped boost real household consumption expenditure per capita by 0.9% in Q1 2015 (chart 4), with the relevant index increasing from 101.6 in Q4 2014 to 102.5 in Q1 2015, the strongest quarterly growth rate of the time period shown.
The households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, increased 0.4 percentage points in Q1 2015, as compared to the prior quarter. Households chose to use some of their increase in income to increase the amount of their savings. The households’ savings rate in Q1 2015 was 15.0%, 1.3 percentage points lower than the peak reached in Q3 2009 (during the depths of the economic crisis). The crisis led to a substantial increase in the savings rate of households, reflecting households’ greater uncertainty on the development of their future income.
Debt and net worth
The households’ indebtedness ratio, i.e. the total outstanding debt of households as a percentage of their disposable income, is a measure of (changes in) financial vulnerabilities of the household sector and can be helpful in assessing debt sustainability. In Q1 2015, household indebtedness in France (chart 6) was 102.2% of disposable income, an increase of 2.3 percentage points from the prior quarter.
A growing debt ratio is often interpreted as a sign of financial vulnerability. However, when assessing 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 on a quarterly basis, financial net worth (i.e. the excess of financial assets over liabilities) is used as an indicator of the financial vulnerability of households.
In Q1 2015, financial net worth of households (chart 7) in France was 246.8% of disposable income, 10.5 percentage points more than Q4 2014. The increase in the first quarter was predominantly due to holding gains on assets (in particular in equity and investment fund shares), but also financial investments, in particular a sharp rise in savings deposits and increases in life insurance contracts, accounting for a significant share of the increase in net worth.
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. In Q1 2015, the unemployment rate was 10.3%, down from 10.5% in Q4 2014. The labour underutilisation rate was 17.8% in Q1 2015, well above the standard unemployment rate but down slightly from the fourth quarter.
As shown above, in order to properly measure people’s material well-being, looking beyond economic growth is essential. In the first quarter of 2015, households in France appear to be better off than GDP figures alone would suggest. To fully grasp people’s overall well-being, one should even go beyond household material conditions, and look at a range of other characteristics that shape what people do and how they feel.
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.
How did inequality and household debt interact in the run up to the 2008/09 financial crisis? Today, a new report by NIESR for the Resolution Foundation provides new evidence on that question for the UK. The new analysis confirms the severity of the borrowing situation of low income households in Britain before the crash and raises difficult questions about patterns of consumption in an era of high inequality.
The report’s key contribution is to dig beneath headline figures for household debt to describe the borrowing picture for households at different points in the income distribution. It’s well established that UK household debt, in common with many other countries, ballooned in the late 1990s and 2000s, with the aggregate savings ratio—the percentage of household disposable income that is saved—turning negative in 2008 for the first time since records began. Yet so far these headline figures have been something of a black box.
Figure 1 from today’s report shows how the decline in the household saving position played out for households in different income deciles. It suggests that the poorest 10 percent of UK households saw their saving position deteriorate catastrophically from the late 1980s onwards, falling to a staggering negative 43 percent by 2007. Put another way, these households were outspending their incomes by 43 percent each year. Even for households on low to middle incomes (those in the second to fifth deciles) the picture was bad for much longer than was previously thought. On average these households had been outspending their incomes for anywhere between ten and 20 years by the time the 2008 crisis struck.
Source: NIESR analysis for the Resolution Foundation, FES
Some will dismiss these findings as unreliable and there is certainly good reason for caution on the specifics. But if the trends seen in Figure 1 do reflect the general pattern of UK spending and borrowing in the run up to the crisis, how should we interpret them?
Two main points of contention emerge between commentators, and although it’s far from definitive today’s report speaks to both. The first relates to the relative importance of income and consumption. Crudely speaking, two camps have emerged in the UK on this question. On the one hand, there are those who see the pre-crisis period as one of profligacy and spending sprees, with consumption soaring on the back of easy credit. On the other, there are those who tell a story of low income growth in which households in the bottom half were forced to borrow just to stay afloat.
Figure 2 speaks to this question. It shows how the two components of the UK savings ratio—consumption and disposable income—grew from 1997 to 2007. Certainly disposable income growth was shockingly weak for the bottom ten percent of households in this period, indeed official data suggests it was weaker still. We also know from wider work that income growth was weak or non-existent for low to middle income households in the later period from 2003 to 2008, supporting a weak incomes story.
Yet the figures on spending aren’t easy reading either. Consumption growth in the bottom half of households appears to have been surprisingly strong in this decade and even to have slightly outpaced consumption growth in the top half. We should be clear that this doesn’t mean low income households went on shopping sprees; we don’t know, for example, how much of this consumption was made up by the rising cost of essentials like food and fuel. And, importantly, we also don’t know how much of how much of this new spending in the bottom half went to service mortgages.
Source: NIESR analysis for the Resolution Foundation, FES
This gets us into the second big dispute between commentators: how much of a role should we assign the housing market in these trends? Big pre-crisis declines in the UK savings ratio would be much less worrying—or at least would be worrying in a very different way—if they were driven simply by increased mortgage repayments. After all, these can be seen as another form of saving, and a pretty sensible form in a booming housing market. In this case, Figure 1 would be little more than another aspect of the UK’s housing boom, and one we can be relatively sanguine about.
It’s hard to conclude either way on this front but the analysis does suggest that increased mortgage borrowing isn’t the only thing driving the figures for the bottom half of households. Across the bottom five deciles of UK household income, for example, the share of households with a mortgage isn’t particularly large, ranging from 10 to 24 percent. These proportions were also pretty stable in the decade before the crisis. At least in later years, then, this wasn’t a story of more low income people taking on mortgages (though there undoubtedly were big increases in the size of each mortgage).
Where does this all leave the link between debt and inequality? We should be careful about strong conclusions when so much relies on interpretation. Overall, though, it’s not hard to see something of a dynamic of ‘keeping up with the Joneses’—or, in technical terms, evidence for the relative income hypothesis—in the consumption figures above, a dynamic that would have realised itself in part in terms of home-buying.
In fact, if there was one moment of agreement at this morning’s launch of the new research it was over the risks that now face low income households in servicing the resultant mountain of secured debt. As Jonathan Portes, Director of NIESR, pointed out, in 2007 there were around 12,000 different mortgage products on the UK market of which around two thirds (nearly 8,000) were aimed at people with ‘impaired credit histories’. Today there are none of the latter, and though the debts they made possible appear serviceable for now, that could all change quickly when rates rise.
Has the rise in debt made households more vulnerable? OECD Working paper