UK consumer spending supported by rising real wealth
Simon Ward
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Household real disposable income fell by 0.8% in 2010 but real wealth gained an estimated 2% to stand only 6% below its 2007 high. A rising wealth to income ratio should maintain downward pressure on the saving ratio, supporting consumer spending.
Household net financial wealth – the market value of financial assets minus debt – grew by 10.1% between end-2009 and end-2010, according to National Statistics figures published last week. This reflected a capital gain on equities and corporate bonds held within life assurance and pension schemes, supplemented by additional saving.
Total wealth includes housing. Official 2010 figures on housing wealth have yet to be released but the Department of Communities and Local Government house price index – a key input – rose by 3.7% in the year to December. Assuming the same increase in the value of the housing stock, total wealth grew by 6% or a real 2%.
This 2% rise follows a 9% gain during 2009, implying that real wealth has retraced two-thirds of its 15% decline during 2008 – see first chart. The ratio of wealth to annual disposable income was an estimated 7.0 at the end of 2010, a level bettered in only two previous years (i.e. 2006 and 2007). The wealth to income ratio is inversely correlated with the saving ratio so the rebound supports expectations that a further fall in the latter will insulate consumer spending from income weakness this year – second chart.
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