Over the period of the credit crunch there have been substantial changes in both the UK economy and its effects on the citizens of the UK. Some have been analysed along the journey but others have received much less of the oxygen of publicity. Today my intention is to peer under the bonnet.
Before I even start an analysis in this area there is the question of what is wealth? This in itself has become less clear cut in these troubled times, or to be more specific the issue of how you value any asset has faced challenges. I would define it as the value of assets held for possible future use less any liabilities but am keen to see what readers think.
The Office for National Statistics calculates a National Balance Sheet or as it puts it the “wealth” of the UK.
It shows the estimated market value of financial assets, for example shares and deposits, and non-financial assets, for example dwellings and machinery. Market value is an estimate of how much these assets would sell for, if sold on the market.
UK total net worth at the end of 2012 was estimated at £7.3 trillion; this was equivalent to approximately £114,000 per head of population or £275,000 per household.
Seems reassuring does it not? But there are a lot of begged questions here. Let me start with the most obvious which is that since the credit crunch era began we are apparently wealthier! At the end of 2007 the net wealth was measured at £6.64 billion so it has on this measure grown by 10% or 2% per year on average.
So after some of the biggest examples of value destruction in UK economic history we have supposedly become wealthier. I am much less sure about that! For example what about our banks? They bestrode the world back in 2007 with enormous valuations and at the end of 2012 were relative minnows with more than a few buttressed by the support of the UK taxpayer.
Apparently when they bestrode the world our financial corporations (banks) were worth -£159.3 billion but have improved by around £380 billion in the subsequent five years to £221 billion. As the ONS was recording a negative net worth for our banks for years in the last decade it apparently was well ahead of everyone!
Also if we return to overall wealth we have to face this issue.
Approximately 55% of household wealth can be attributed to dwellings…..The most valuable assets in this sector were dwellings (£4.2 trillion)
As we consider how this can be measured we come across a can full of worms. It is always unreliable to use marginal prices (sales) as a measure of what the price would be if all were sold but is particularly true right now with sales volumes having declined so much.
Also we face the concept of an economy apparently driven by house prices yet again and the emphasis below is mine.
Dwellings were the most valuable non-financial asset in the UK. They have steadily increased in value in recent years, except for a fall in 2008. In 2012 they were 60% of the value of UK nonfinancial assets.
So if we keep driving house prices higher we will all be wealthier? There is an enormous circularity there! All assets depend on how they are valued but one which cannot be moved (with the exception of mobile homes) depends much more on the “valuation” element and ends up being virtually entirely domestic,especially if we exclude central London. I note that Faisal Islam of Channel 4 has put it thus.
But imagine if the entire queue of prospective house purchasers is flooded with mortgage credit. At this point, the house price is set by the greatest optimist.
And national wealth surges…
Still it seems that the govenrment and the Bank of England have cottoned onto this game. The policies in current use are.
Cutting Base Rates to 0.5%, £375 billion of Quantitative Easing, Funding for Lending Scheme and now also Help to Buy.
If the Council of Mortgage Lenders is correct this morning then the pilot light for the burners has been lit.
The Council of Mortgage Lenders estimates that total gross mortgage lending in July increased to £16.6 billion, representing a rise of 12% from £14.8 billion in June and 29% higher than the total of £12.9 billion in July last year. This is the highest monthly estimate for gross lending since October 2008 (£18.6 billion).
So we seem to be solidly on the road to telling ourselves that we are wealthier by paying more for our own housing stock. I suspect that it will turn out to be more like this from David Byrne.
We’re on a road to nowhere
Indeed our central bank and government seem especially keen on this verse.
Well, we know where we’re goin’
But we don’t know where we’ve been
And we know what we’re knowin’
But we can’t say what we’ve seen
Now here is an area where we show signs of decreasing and not increasing wealth. From the Office for National Statistics.
Average household energy consumption in England and Wales decreased 24.7% between 2005 and 2011, from 26.2 megawatt hours (mWh) in 2005 to 19.7mWh in 2011.
It would be nice to think that better insulation and efficiency drove this but I suspect that the driving force was this.
The price of gas and electricity in the UK overall increased in all years apart from 2010, between 2005 and 2011.
One part of economic theory is working here as a higher price leads to less consumption. However if we return to the wealth argument and remind ourselves that energy costs have risen considerably since 2011 then we are plainly much worse off if we valued it in terms of domestic energy costs. According to the Retail Price Index data.
the price of domestic gas increased from an index 100 in 2005, to 201.4 in 2011. The price of domestic electricity increased from an index of 100 in 2005, to 166.1 in 2011.
Wondering what happened next? I did too so I looked it up. The UK domestic gas price index was at 239.1 at the end of June and the domestic electricity index was at 187.3.
So we have been not to put too fine a point on it been blitzed in wealth terms if we use the cost of energy as the yardstick. In the credit crunch era the price of domestic gas has risen by 68% and domestic electricity has risen by 43%.
What about Income?
If you were arguing that incomes might have contributed to the apparent rise in UK wealth then the data does not help you.
In the five years prior to the economic downturn, Real Household Disposable Income (RHDI) per head grew at an average annual rate of 1.1%. However, since 2008 RHDI per head contracted at an annual average rate of 0.2%.
The contraction may seem less than you think and were expecting and a lot of this comes from the fact that the Taxes and Benefits section has stepped up to the plate and operated as an automatic stabliser. This in itself is clearly very different to the picture presented in the mainstream media and has quite a few consequences. They are worth a post on their own so for now I will simply point out that they have boosted the numbers by 3.7% in the credit crunch era.
One way of claiming higher wealth is to have more people which of course we do have in the UK.
The estimated usual resident population of the UK increased by 419,900 (0.7%) in the year ending 30 June 2012;
Compared with the annual population change seen over the period since mid-2001, the increase in the year ending mid-2012 is about average for the period.
So if we switch to economic growth for a moment even with the improved numbers of 2013 so far we have in fact made little progress per head. Also we need to examine the wealth “gains” one more time from another perspective.
As we face the future it is my contention that we are considerably less wealthy than when the credit crunch began and the official statistics are again in danger misleading us. Also the credit crunch is making the more thoughtful look deeper into the concepts of wealth,prices,inflation and value and their usefulness.