Rachida Dkhissi, OECD Statistics Directorate
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. This blog looks into how households in Italy are doing by looking at a number of alternative indicators.
GDP and Household Income
Chart 1 shows how much GDP and household income have declined since the first quarter of 2007, just before the start of the economic crisis, with this period representing the baseline value 100. For the most recent quarter, Q2 2015, GDP per capita, which adjusts economic growth for the size of the population, increased 0.3% from the previous quarter. The index increased from 87.9 in Q1 2015 to 88.2 in Q2 2015, which is still around 12 percentage points below the pre-crisis level. Real household disposable income per capita increased at the same pace as real GDP per capita in Q2 2015 (0.3%), with the index increasing from 86.6 in Q1 2015 to 86.8 in Q2 2015. Real household income has moved in tandem with real GDP per capita: in Q2 2015 the household income index was 13 percentage points below the baseline of Q1 2007. This means that households have less purchasing power now that they had before the crisis. Chart 1 also shows that over the last 8 years, GDP and household income have declined in more quarters than they have grown.
The primary income of households fell in Q2 2015 compared with the previous quarter. Although there was a slight increase of income for the self-employed, this was entirely offset by a drop in net property income received (mainly due to a decrease in dividends received). . The fact that households experienced an increase in disposable income in Q2 2015 was mainly due to cash social benefits received by households, as can be seen in chart 2, which shows the net cash transfers to households.
Chart 2 also shows that the decline in the net cash transfers to households ratio from Q4 2011 to Q3 2012 corresponded to a time when household disposable income was falling faster than GDP, 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 also look at households’ consumption behaviour. Chart 3 shows that consumer confidence remained broadly stable in Q2 2015 at 101.5 suggesting that with two consecutive quarters of positive economic growth consumers continued to be relatively confident about their economic situation. This confidence coupled with a rise in household income helped real household consumption expenditure per capita increase by 0.4% in Q2 2015 (chart 4), with the relevant index increasing from 89.4 in Q1 2015 to 89.7 in Q2 2015, the strongest quarterly growth rate since Q3 2010. However, Italian households are still buying less goods and services to meet their own everyday needs than they were before the crisis.
The households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, decreased 0.1 percentage point in Q2 2015, as compared to the prior quarter, showing that households used their entire increase in income to consume goods and services. The households’ savings rate in Q2 2015 was 11.1%, 3.9 percentage points lower than the peak reached in Q1 2009 (during the depth of the economic crisis). Since Q1 2009, the declining trend in the savings rate reflects households’ need to trade-off between saving and consumption as income kept falling.
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 households’ debt sustainability. In Q2 2015, household indebtedness in Italy (chart 6) was 82.5% of disposable income, a marginal increase of 0.1 percentage point from the prior quarter showing that households financed some of their consumption by increasing their debt.
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 Q2 2015, financial net worth of households (chart 7) in Italy was 280.1% of disposable income, 3.5 percentage points less than Q1 2015. The decrease in the second quarter was mainly due to holding losses on debt securities on the asset side and an increase in household debt (mainly trade credits). This resulted in a slight deterioration of the households’ financial net worth in Q2 2015.
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 Q2 2015, the unemployment rate remained stable at 12.4%, the same rate as the previous quarter. The labour underutilisation rate was 28.9% in Q2 2015, well above the standard unemployment rate and remained unchanged compared with the first quarter.
One should keep in mind that households’ income, consumption and savings may differ considerably across various groupings of households; the same holds for households’ indebtedness and (financial) wealth. The OECD is working on these distributional aspects and preliminary results can be consulted here and here.
As shown above, in order to properly measure people’s material well-being, looking beyond economic growth is essential. The economic crisis has hit hard for households in Italy. The unemployment rate remains high and income and consumption levels have yet to recover to pre-crisis levels. Yet, the second quarter of 2015 shows a slight improvement in households’ material well-being. To fully grasp people’s overall well-being, one should even go beyond material conditions, and look at a range of other characteristics that shape what people do and how they feel. For more than 10 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 web site.
Interested in how households are doing in other OECD countries? Visit our households’ economic well-being dashboard.