Economic well-being, UK: July to September 2015

• In Quarter 3 (July to September) 2015, gross domestic product (GDP) per head increased 0.3% compared with Quarter 2 (April to June) 2015 and is now 0.3% above pre-economic downturn levels. This was a slightly slower growth rate than the 0.4% quarterly increase seen in GDP

• In Quarter 3 2015, net national disposable income (NNDI) per head, which represents the income available to UK residents, increased 1.3% compared with Quarter 2 2015, but remains 0.1% below pre-economic downturn levels

• In Quarter 3 2015, real household disposable income (RHDI) per head (excluding non-profit institutions serving households) increased 0.3% compared with Quarter 2 2015 and increased 3.3% compared with the same quarter a year ago (Quarter 3 2014). Overall, it remains broadly in line with the level of household income seen in mid-2012

• In the financial year ending 2015 (April 2014 to March 2015), median income (the income of the middle household if all households are ranked from the lowest income to the highest) was £25,600 – 3.0% higher than in the financial year ending 2014 (April 2013 to March 2014). This continues the rise in median income seen since financial year ending 2013 to reach a similar amount to pre-economic downturn levels

• In Quarter 3 2015, household spending per head grew 0.6% compared with the previous quarter – continuing the general upward trend seen since Quarter 3 (July to September) 2011

• In the period July 2012 to June 2014, the wealth held by the top 10% of households accounted for 45% of total aggregate household wealth and was around 5 times greater than the wealth of the bottom half of all households combined

• In 2014, the net worth of the economy as a whole increased 5.0% to £8.1 trillion. In the same year, household net worth increased 12.2% (by £1.0 trillion) to £9.4 trillion, the largest year-on-year percentage change since 1998

This release considers the measurement of economic or material well-being, presenting a number of indicators alongside commentary that, together, give a more rounded and comprehensive basis for assessing changes in economic well-being. More detail can be found in the Economic Well-being, Framework and Indicators article. Economic well-being is a subset of the measurement of national well-being and recognises that many dimensions of well-being are outside the material sphere (for example, our “Wheel of Well-being”).

Real GDP per head

In Q3 2015, gross domestic product (GDP) per head, which adjusts GDP for the size of the population, increased 0.3% compared with Q2 2015. This was a slightly slower growth rate than the 0.4% quarterly increase seen in GDP, which recovered to its pre-economic downturn level in Q2 2013. The quarterly growth in GDP per head means that it is now 0.3% above its pre-economic downturn level, having initially surpassed its pre-economic downturn level in Q2 2015.

Between 2013 and 2014, GDP per head increased 2.1%. This was slower than the 2.9% increase in GDP over the same period.

Real net national disposable income (NNDI) per head

In Q3 2015, NNDI per head increased 1.3% compared with Q2 2015. This was a faster growth rate than the 0.3% quarterly increase seen in GDP per head.

Between 2013 and 2014, NNDI per head increased 1.4%. This was slower than the 2.1% increase in GDP per head over the same period.

As discussed in the Economic Well-being, Framework and Indicators article, there are 2 main differences between GDP per head and NNDI per head:

First, not all income generated by production in the UK will be payable to UK residents. Some of the capital employed will be owned by non-residents and they will be entitled to the return on that investment. Conversely, UK residents receive income from production activities taking place elsewhere, based on their investments overseas. Adjusting for these flows gives a measure that is more focused on income rather than production.

Second, these measures can be adjusted for capital consumption. GDP is “gross” in the sense that it does not adjust for capital depreciation, that is, the day-to-day wear and tear on vehicles, machinery, buildings and other fixed capital used in the productive process. It treats such consumption of capital as no different from any other form of consumption. But most people would not regard depreciation as adding to their material well-being.

GDP per head and net domestic product (NDP) per head, which just makes the adjustment for capital depreciation, track reasonably well over the course of the recession, suggesting that the impact of capital consumption is relatively low.

However, NNDI has behaved somewhat differently to GDP, particularly since late 2011. NNDI, which represents the income generated by production that is payable to UK residents, was broadly flat between Q1 2012 and Q4 2014. Since Q4 2014, NNDI per head has grown sharply, increasing 4.7% between Q4 2014 and Q3 2015 and is now 0.1% below its pre-economic downturn level. This compares with GDP per head which was 0.3% above its pre-economic downturn level in the same quarter.

The difference between the experience of GDP per head and NNDI per head since late 2011 can be explained by looking at the balance of primary incomes, which captures flows of income into and out of the UK economy.

One main part of primary incomes is direct investment; that is, earnings from investments in which an investor owns 10% or more of the ordinary shares or voting power in an incorporated enterprise, or an equivalent ownership in an unincorporated enterprise.

Since late 2011, there has been a fall in the balance of earnings on foreign direct investment (FDI) (the difference between earnings from direct investment abroad and from foreign direct investment in the UK). The continued fall to the balance of earnings on direct investment since late 2011 actually resulted in a direct investment deficit for Q3 and Q4 2014, the first such deficit since Q4 2008. This deterioration is attributed to both subdued earnings for UK residents’ from direct investment abroad and an increase in foreign earnings on direct investment in the UK. The balance of earnings on foreign direct investment has since rebounded slightly, returning to a surplus in Q1 2015 and has continued to improve throughout 2015. In Q3 2015, the balance of earnings on direct investment improved to £2.9 billion (from £1.8 billion in Q2 2015), reflecting a larger decrease in earnings on direct investment in the UK relative to the decrease in the amount the UK earns from its direct investment abroad.

Perception of the economic situation

The Eurobarometer Consumer survey asks respondents how they think the general economic situation has changed over the last 12 months. In September 2015, the aggregate balance stood at negative 4.5. The small negative balance suggests that on average, respondents think the economic situation has got slightly worse compared with a year ago, although in general it is broadly similar. This is a slight fall on the 2.3 aggregate balance recorded at the end of the second quarter of 2015, but the series has been on a general upwards trend in recent years. At its lowest, in May 2009, the Eurobarometer reported an aggregate balance of negative 82.3.

In Q3 2015, real household disposable income (RHDI) per head (excluding non-profit institutions serving households) increased 3.3% compared with the same quarter a year ago (Q3 2014). In Q3 2015, RHDI per head (excluding NPISH) increased 0.3% compared with Q2 2015. For 2014 as a whole, RHDI per head (excluding NPISH) was down 0.1% compared with 2013.

Overall, in Q3 2015, RHDI per head (excluding NPISH) was 3.3% above its pre-economic downturn level.

In previous releases, we considered RHDI per head of the household and non-profit institutions serving households (NPISH) sector. In March 2015, we published initial estimates of the real disposable income of households only. We consider this a better indicator of the economic well-being of households. Real household and NPISH disposable income per head will continue to be published alongside RHDI per head (excluding NPISH) in this release.

Real household and NPISH disposable income per head increased 3.2% in Q3 2015 compared with the same quarter a year ago (Q3 2014). For 2014 as a whole, real household and NPISH disposable income per head decreased 0.1%.

As GDP began to fall in mid-2008, RHDI (excluding NPISH) per head remained relatively resilient. By Q2 2009, RHDI (excluding NPISH) per head was 3.8% above its pre-economic downturn level. This initial improvement in real household income per head was a result of several factors.

Firstly, interest rates reached historic lows and therefore household incomes were helped by falling mortgage payments.

Additionally, as employment fell and unemployment rose, people paid less income tax and claimed more benefits, supporting RHDI per head (excluding NPISH). However, moving into early 2011, the impact of these factors wore off and inflation rose. Prices grew more strongly than household income and therefore, over time, people found that their income purchased a lower quantity of goods and services.

Following this, RHDI per head (excluding NPISH) began to rise in early 2012 before stabilising toward the end of 2012 and falling over a few quarters in 2013 to reach its pre-economic downturn level in Q4 2013. Over the last few quarters, however, RHDI per head (excluding NPISH) has shown positive growth. In Q3 2015, RHDI per head (excluding NPISH) increased 3.3% compared with the same quarter a year ago and was 3.3% above its pre-economic downturn levels.

For international comparisons it is important to consider benefits in kind. The real household and non-profit institutions serving households (NPISH) adjusted disposable income per head series, which makes the adjustment for benefits in kind, can be found in the reference table.

Perception of financial situation

As well as considering levels of household income, it is important to consider individuals' perceptions of their own income. The Eurobarometer Consumer survey¹ asks respondents their views on the financial situation of their household over the past 12 months. A negative balance means that, on average, respondents reported their financial situation got worse, a positive balance means they reported it improved and a zero balance indicates no change.

Between the end of Q2 2015 and the end of Q3 2015, the aggregate balance fell from 3.6 to 1.4, continuing the positive balances that have been seen in recent months following sharp increases since early 2013.The figure suggests that, on average, households are beginning to feel their financial situation has improved over the past 12 months.

The Eurobarometer Consumer survey also asks respondents their views on whether now is a good time to save. Between the end of Q2 2015 and the end of Q3 2015, the balance increased from 1.9 to 4.4. The balance had been negative from April 2011 onwards, but following improvements from May 2013, the series reached a positive figure in June 2015. This continued throughout Q3 2015 and suggests that respondents believe now is a good time to save. Also, on average, households reported saving at least some of their income.

Additionally, Understanding Society² provides information on the proportion of individuals that report being somewhat, mostly, or completely, satisfied with the income of their household and the proportion of households that report finding it quite, or very, difficult to get by financially.

In the financial year ending 2014, the proportion of individuals that reported finding it difficult to get by financially was 9.1%. This was 1.0 percentage point lower than a year earlier, continuing the downward trend since it peaked at 12.3% in the financial year ending 2010. Despite falling in recent years, the proportion of individuals that report finding it difficult to get by financially remains above pre-economic downturn levels.

In the financial year ending 2014, the percentage of respondents that were somewhat, mostly, or completely, satisfied with their level of income was 53.7%. This is broadly unchanged from a year earlier. Satisfaction with income demonstrated a downward trend between 2007 and the financial year ending 2012, recording a 4.5 percentage point decline between the financial years ending 2011 and 2012. While the increase in the financial year ending 2013 and 2014 shows some improvement in this trend, it remains below the levels seen prior to the economic downturn.

Distribution of income

In order to meet the considerable user demand for more timely data on household incomes, we developed a set of Experimental Statistics, produced using so-called "nowcasting" techniques. The latest nowcasting data can be found in Nowcasting household Income in the UK: Financial year ending 2015.

More information on the methodology can be found in Nowcasting household income in the UK: Methodology, 2015.

The estimates are marked (p) to indicate they are provisional – the finalised data will be released in the effects of taxes and benefits publication scheduled for mid-2016. All previous publications can be found on the effects of taxes and benefits publications page.

In the financial year ending 2015, median income (the income of the middle household if all households are ranked from the lowest income to the highest) was £25,600(p), which is 3.0% higher than financial year ending 2014. This continues the rise in median income seen since financial year ending 2013 and sees median income at a similar amount to its pre-economic downturn level.

As it represents the middle of the income distribution, the median household income provides a good indication of the income of the “typical” household. However, it is also important to consider how income is distributed around the middle, considering the equality of the income distribution.

One indicator is the ratio of total income received by the richest fifth of households to that received by the poorest fifth (other indicators are available). If the ratio gets larger then it implies increasing inequality between the top fifth and bottom fifth of households.

Between the financial years ending 2014 and 2015, this ratio saw a small decrease from 5.3 to 5.1(p); suggesting a small decrease in income inequality. However, since the turn of the millennium, changes in income inequality have been relatively small compared with previous decades.

Notes for household income

1. The Eurobarometer Consumer Survey is collected by GfK for the European Commission. There is more information about interpreting the Eurobarometer Consumer Survey in background note 5.
2. Understanding Society is a household longitudinal study that captures information from a representative UK sample. More information can be found in background note 6.
3. Real household disposable income (RHDI) is published in both non-seasonally adjusted (NSA) and seasonally adjusted (SA) formats in the United Kingdom Economic Accounts, with the latter removing seasonal effects to allow comparisons over time. However, it is sensitive to short-term changes in its components, particularly on a quarterly basis, meaning that quarter on quarter movements can appear volatile. To better present the longer term movement in household income, this bulletin presents RHDI growth on a quarter on the same quarter a year ago and on an annual basis.
4. The income measure used in this section is real equivalised household disposable income. Disposable income is the amount of money that households have available for spending and saving after direct taxes (such as income tax and council tax) have been accounted for. It includes earnings from employment, private pensions and investments, as well as cash benefits provided by the state. Equivalisation is the process of accounting for the fact that households with many members are likely to need a higher income to achieve the same standard of living as households with fewer members.
5. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

Income is a viable measure of the material well-being in the economy, however, a fuller picture of the economic well-being of a country can be found by looking at how much households consume.

In June 2014, we published Income, Expenditure and Personal Well-being, 2011/12, which presented new findings on the relationship between personal well-being, household income and expenditure using regression analysis. It found that household expenditure appeared to have a stronger relationship with personal well-being than household income.

In Q3 2015, real household spending per head grew 0.6% compared with the previous quarter, continuing the general upward trend seen since Q3 2011. However, real household spending per head remains 1.0% below its pre-economic downturn level. This is despite the fact that real household income per head (excluding NPISH) was 3.3% above its pre-economic downturn level in Q3 2015.

Since Q3 2011, real household spending per head has steadily increased. This could reflect improved economic sentiment among households. In 2014 overall, real household spending per head was 1.7% higher than 2013. The pace of growth in 2014 was faster than the 1.3% growth seen between 2012 and 2013.

As with household income, for international comparisons it is important to consider benefits in kind. Real household and non-profit institutions serving households (NPISH) actual final consumption per head, which makes the adjustment for benefits in kind, can be found in the reference table.

This section considers 2 different measures of wealth; net worth from the national accounts and household wealth from the Wealth and Assets Survey (WAS).

Total net worth

In 2014, the net worth of the economy as a whole (of households, businesses and the government) increased by £385 billion (5.0%), to £8.1 trillion. Total net worth is the sum of the values of financial assets (for example, shares and deposits) and non-financial assets (for example, dwellings and machinery), minus financial liabilities. Growth in total net worth between 2013 and 2014 was mainly attributable to an increase in the net worth of households, which increased by £1.0 trillion (12.2%) to £9.4 trillion. This was partly offset by decreases in the net worth of financial corporations (-£364 billion), non-financial corporations (-£54 billion) and government (-£227 billion).

This measure has not been adjusted for inflation, which was 1.5% on average, as measured by the Consumer Price Index (CPI) between 2013 and 2014. This suggests that the growth in total net worth was stronger than the growth in the general price level between 2013 and 2014.

The net worth of the economy as a whole is important as it indicates the sustainability of current levels of production and corresponding income flows. It is possible that a nation might be increasing its output while its stock of assets decline. This could mean that its level of production is unsustainable. However, for a complete appraisal of sustainability, natural, human and social capital should also be considered¹.

Figure 5 shows total net worth between 2004 and 2014 for the whole economy and 3 of the sectors: households, financial and non-financial corporations. Between 2004 and 2007, total net worth increased year-on-year, mainly attributable to an increase in household net worth. Total net worth then fell in 2008 and 2009, before increasing again following the economic downturn.

Household net worth

Household net worth increased by £1.0 trillion (12.2%) to £9.4 trillion between 2013 and 2014. This is the largest year-on-year percentage change since 1998, when household net worth grew by 13.8%.

Household net worth provided the largest contribution to the growth in whole economy total net worth in 2014. This is equivalent to an average of £354,000 per household, compared with £316,000 per household in 2013.

As with total net worth, household net worth has not been adjusted for inflation. As a result, these figures should be taken in some context. For instance, household net worth includes non-financial assets, such as houses. Annual house price inflation was 10.0%2 in 2014. Figure 6 shows the household net worth position by type of asset between 2004 and 2014.

The main contributing asset category to the 12.2% increase in household net worth between 2013 and 2014 was net financial assets, which increased 17.3%.

Dwellings, the most valuable asset in household net worth (£4.8 trillion; 51% of household net worth in 2014), increased 9.1% over the same period. "Other non-financial" assets also grew 1.8% between 2013 and 2014 – a slower rate than increases seen in other asset categories.

Distribution of household wealth

In December 2015, the main results from the Wealth and Assets Survey for the period July 2012 to June 2014 were published. Estimates from WAS are updated every 2 years, therefore different measures demonstrating the distribution of wealth will be presented at this point in each quarterly bulletin.

Table 1 shows that in July 2012 to June 2014 half of all private households in Great Britain had a total wealth of £225,100 or more (all figures are at current prices and not adjusted for inflation). This does not however demonstrate the highly skewed distribution of wealth.

Table 1 shows the distribution of wealth across all households. In addition to the statistics given in the chart, the wealth held by the top 10% of households, which accounted for 45% of total aggregate household wealth, was around 5 times greater than the wealth of the bottom half of all households combined and over 875 times greater than that of the least wealthy 10% of households. For more details see Wealth in Great Britain Wave 4, 2012 to 2014.

Notes for wealth

1. These measures are currently under development as part of the Measuring National Well-being programme and will be included in future releases where relevant.
2. Calculated using a mix-adjusted index, which adjusts house prices for the types of property being sold from one year to the next.
3. Here "net" is used to describe the net wealth position (assets minus liabilities), rather than making an adjustment for capital consumption.
4. Other non-financial assets includes “other buildings and structures”, “machinery and equipment”, “cultivated biological products”, “intellectual property products”, “inventories” and “contracts, leases and licences”.
5. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

In the 3 months to September 2015 (Q3 2015), the unemployment rate for those aged 16 and over was 5.3%, down 0.3 percentage points from the 3 months to June 2015 (Q2 2015). This continues the downward trend since a peak in unemployment of 8.4% in Q4 2011. Further, unemployment is now only 0.1 percentage points above its pre-economic downturn level of 5.2% in Q1 2008.

The unemployment rate fell sharply between Q2 2013 and Q1 2015 at an average of 0.3 percentage points per quarter. It then stabilised in Q2 2015 before falling once again in Q3 2015. The fall in the unemployment rate has been accompanied by a fall in the inactivity rate. This was driven by lower retirement rates, lower long-term sick and disabled, and fewer people looking after their family.

Unemployment can have an impact on economic well-being through the impact on individuals’ income, as well as a direct impact on their personal well-being (how satisfied they are, how worthwhile they consider their life to be, their happiness and anxiety levels).

The employment rate for those aged 16 to 64 increased to 73.7% in the 3 months to September 2015 – the highest on record. This is up from 73.0% in the same quarter a year ago. The association between rising employment and rising part-time and temporary employment appears to be continuing, despite recent one-off dips. Since Q3 2008 the number of part-time employees has increased 7.4% and the number of temporary employees has increased 19.5%.

Notes for unemployment

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

In September 2015 (the final month of Q3 2015), the rate of inflation as measured by the Consumer Prices Index (CPI) fell back to its joint record low of negative 0.1%, which was last recorded in April 2015. Since early 2015, the CPI 12-month rate has been very close to 0.0%. This means that, taken as a whole, households have experienced very little change in prices compared with the same months in 2014. The September 2015 rate of inflation was down 0.1 percentage points from the 0.0% rate recorded in August 2015 and 0.2 percentage points from the 0.1% recorded in July 2015.

Since January 2008, inflation has twice peaked at 5.2% (in September 2008 and September 2011) but has since fallen sharply. Much of the recent downward pressure is accounted for by falling energy, food and fuel prices. This partially reflects the recent decline in oil prices, the appreciation of sterling and strong competition among retailers.

Since Q3 2015, CPI inflation has continued to remain weak. In the year to November 2015 (the latest data point available), the CPI was 0.1%. This was 0.2 percentage points higher than the negative 0.1% recorded in the year to October 2015. The main contributors to this rise were movements in transport costs, and alcohol and tobacco prices. This was partially offset by falling clothing prices.

The rate of inflation is important for economic well-being due to its effect on both income and savings. When prices increase faster than income for a sustained period, all else equal, incomes have less purchasing power and households feel worse off. Equally, if incomes increase faster than prices, over time, incomes can buy more and households feel better off. The income section of this release considers the evolution of household income, adjusted for inflation. In addition, inflation can impact on households through its effect on savings. If inflation is lower than the interest rates offered to households by financial institutions, then the real value of savings increases. Similarly, if inflation is higher than these interest rates then the real value of savings decreases.

Perceptions of inflation

It is important to consider not only inflation itself, but also individual’s perceptions of price trends. The Eurobarometer Consumer Survey asked respondents how they thought consumer prices had developed over the past 12 months. Individual’s perceptions of price changes have mapped reasonably well to actual changes in price levels over the last year.

There has been a general downward trend since mid-2011 with the aggregate balance falling to negative 7.9 in September 2015 (the last month of Q3), up from negative 8.6 in June 2015 (the last month of Q2). This compares with an aggregate balance of negative 6.2 in August 2015 and negative 7.1 in July 2015. An aggregate balance near zero implies that, on average, people perceive prices to be similar to that of a year ago whereas a negative figure means people perceive prices to have fallen over the last 12 months.

The slight negative figure is broadly in line with the negative 0.1% rate of inflation reported for the same period.

Notes for inflation

1. Throughout this release Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).