4. What were the main changes in economic well-being in Quarter 1 2017?

Figure 2: Four measures of economic well-being, Quarter 1 (Jan to Mar) 2008 to Quarter 1 2017 Source: Office for National Statistics Notes: Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 (July to September) and Q4 refers to Quarter 4 (October to December). Households do not include non-profit institutions serving households (NPISH). The above indicators are presented in real prices. Download this chart Figure 2: Four measures of economic well-being, Quarter 1 (Jan to Mar) 2008 to Quarter 1 2017 Image .csv .xls

Real gross domestic product per head

Growth in real gross domestic product (GDP) per head was 0.0% in Quarter 1 (Jan to March) 2017 compared with the previous quarter – down 0.5 percentage points on growth in the previous quarter. This was a slower growth rate than the 0.2% quarterly increase in GDP.

The growth rate in GDP per head in Quarter 1 2017 was the joint-lowest recorded over the past 4 years and was 0.4 percentage points lower than average growth over this period.

Real net national disposable income per head

Real net national disposable income (NNDI) per head increased by 4.3% between Quarter 1 2017 and Quarter 1 2016, compared with a 1.3% increase in GDP per head over the same period. Growth in NNDI per head recorded in Quarter 1 2017 continues the marked improvement in the series beginning at the end of 2016 and is 2.5 percentage points above average growth over the past 4 years.

As shown in the “Economic well-being indicators at a glance” section, NNDI per head represents the income available to all residents in the UK. There are two 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. For example, a country whose firms or assets are predominantly owned by foreign investors may well have high levels of production, but a lower national income once profits and rents flowing abroad are taken into account. As a result, the income available to residents would be less than that implied by measures such as GDP.

Second, NNDI per head is 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.

Following 2 quarters of negative growth in Quarter 4 (Oct to Dec) 2015 and Quarter 1 2016, NNDI per head increased continuously. During this period, average growth was 2.7% per quarter (compared with the same quarter a year ago), compared with 1.2% average growth in GDP per head. This means that the growth in income available to residents to spend or save is greater once cross-border flows are taken into account.

The improvement in NNDI per head over recent quarters is mainly driven by an increase in the income to UK residents from investments abroad. Compared with the same quarter a year ago, the income to UK residents from investments abroad has increased by an average £1.4 billion per quarter between Quarter 2 (July to Sept) 2016 and Quarter 1 2017. This is in contrast with the period between Quarter 1 2012 and Quarter 1 (Apr to June) 2016, when the income that UK residents received from investments abroad fell by an average £0.7 billion per quarter.

More detailed analysis on the contributions to growth in NNDI and the relationship with the balance of primary incomes was presented in Economic well-being: Quarter 4, Oct to Dec 2016.

Household income

Unless stated otherwise, analysis of real household disposable income (RHDI) in this bulletin excludes non-profit institutions serving households (NPISH). We consider this a better indicator of economic well-being as it focuses more on the household experience than the traditional measure, which includes the NPISH sector. Real household and NPISH disposable income per head will continue to be published alongside RHDI per head (excluding NPISH) in the datasets.

In Quarter 1 2017, RHDI per head declined by 2.0% compared with the same quarter a year ago (Quarter 1 2016) – 3.0 percentage points lower than the 4-year average growth rate, but still 3.3% above its pre-economic downturn level.

Figure 3: Contributions to quarter-on-same-quarter-a-year-ago growth in real household disposable income per head, chain volume measure, Quarter 1 (Jan to Mar) 2013 to Quarter 1 2017 UK Source: Office for National Statistics Notes: Real household disposable income includes non profit institutions serving households (NPISH). 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). Contributions may not sum due to rounding. Download this chart Figure 3: Contributions to quarter-on-same-quarter-a-year-ago growth in real household disposable income per head, chain volume measure, Quarter 1 (Jan to Mar) 2013 to Quarter 1 2017 Image .csv .xls

Despite growth in both NNDI per head and GDP per head in Quarter 1 2017, RHDI decreased at the fastest rate since the end of 2011. Figure 2 highlights the contributions to growth from different components of RHDI (including NPISH). It shows that, higher prices facing households had a negative contribution to RHDI (including NPISH) growth in Quarter 1 2017 compared with the same quarter a year ago – contributing negative 1.8 percentage points. However, growth in wages and salaries (in nominal terms) supported RHDI (including NPISH), contributing 1.7 percentage points.

Adjusted household income

One of the limitations of RHDI per head as a measure of economic well-being is that it does not take into account transfers-in-kind – such as education and health care services – that households receive.

To examine the role of these types of benefits more closely, this section of the bulletin compares changes in real adjusted gross household disposable income (RAHDI) with RHDI (including NPISH). RAHDI is an adjusted version of RHDI, which incorporates social transfers in kind (STIK).

STIK consist of individual goods and services provided as transfers-in-kind to individual households by government units and non-profit institutions serving households (NPISHs), whether purchased on the market or produced as non- market output by government units or NPISHs.

Figure 4: Growth rates of real household and NPISH disposable income (RHDI)per head and adjusted RHDI per head, and impact of social transfers in kind Quarter 1 (Jan to Mar) 2004 to Quarter 1 2017, UK Source: Office for National Statistics Notes: Real household disposable income includes non profit institutions serving households (NPISH). 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). Data are presented in real prices. Quarter-on-same-quarter-a-year-ago growth rate Download this chart Figure 4: Growth rates of real household and NPISH disposable income (RHDI)per head and adjusted RHDI per head, and impact of social transfers in kind Image .csv .xls

Figure 4 highlights that during the period between Quarter 1 2004 and Quarter 4 2008, average RAHDI per head growth was higher than RHDI per head growth – 1.1% per quarter compared with 0.7% per quarter respectively. This suggests that over this period, households were receiving additional benefits not captured in RHDI, with positive implications for economic well-being.

However, from Quarter 1 2009 to Quarter 1 2017, the growth of STIK waned, meaning that both measures of income followed similar trajectories – each growing at an average of 0.4% per quarter (compared with the same quarter a year ago).

Figure 5: Contributions to year-on-year growth in social transfers in kind per head by individual components, 2004 to 2015 UK Source: Office for National Statistics Notes: The STIK are presented in current prices. Download this chart Figure 5: Contributions to year-on-year growth in social transfers in kind per head by individual components, 2004 to 2015 Image .csv .xls

Figure 5 examines the reversal in the growth of STIK per head analysing, in current prices, contributions from health and education services, social protection (such as social housing), and recreation and culture (for example, libraries).

It highlights that in the period leading up to 2010, all components provided positive contributions to growth in STIK per head, with government expenditure on healthcare and education services the main drivers. Average annual growth in STIK per head was 6.0% between 2004 and 2009, with average contributions of 3.5 and 1.7 percentage points from healthcare services and education services respectively.

However, following 2009, average annual growth in STIK per head was 4.8 percentage points lower compared with the period prior to 2009. This was mainly driven by a fall in the growth rate in the value of education services provided – contributing 0.0 percentage points on average per year since 2009.

Household expenditure

In Quarter 4 2016, real household spending per head (excluding non-profit institutions serving households (NPISH)) grew 0.2% compared with the previous quarter, continuing the general upward trend seen since Quarter 3 2011. As highlighted in Figure 1, real household spending per head (excluding NPISH) was 0.2% higher than its pre-economic downturn level in Quarter 1 2017. This is despite real household disposable income per head (excluding NPISH) being 3.3% above its pre-economic downturn level in Quarter 1 2017.

The increase in household spending and the decrease in household income had a negative impact on the saving ratio. The household and NPISH saving ratio decreased from 6.1 to 1.7 from Quarter 1 2016 to Quarter 1 2017.