16 Dec 2020 - The recent publication of official economic growth estimates for the second quarter of 2020 confirmed the unprecedented impact of COVID-19 on OECD economies. Although the effects of a second (and possible third) wave may still play out, the impacts from the first wave are already clearly visible in macro-economic indicators. This statistical insight focuses on the impact of the crisis on the households’ disposable income, consumption and savings in reaction to government policies aimed at limiting the spread of the virus. It also explores the impact of government measures implemented during the crisis on government finances.
Developments in household disposable income (HDI) provide a convenient window into the impact of COVID-19 on households. HDI is the income that is available for final consumption expenditure and saving. HDI thus shows whether households have been able to maintain their levels of material well-being, or at least their ability to maintain current levels of consumption and wealth, as compared to the period prior to the pandemic.
Figure 1, which presents results for eight large economies,1 shows that growth (or decline) in nominal HDI during the second quarter of 2020 was quite varied. Positive growth could be observed in Canada (10.7%), the United States (10.1%), Japan (9.7%)2 and Australia (2.2%). On the other hand, Italy, the United Kingdom, France, and Germany all recorded declines in nominal HDI, by (minus) 7.4%, (minus) 2.8%, (minus) 2.3% and (minus) 0.7% respectively. While the declines observed in the European countries were the largest in over ten years, it is important to note that they were all significantly smaller than the declines in nominal GDP for the same period. A full comparison of the difference between GDP and household income during the second quarter of 2020 is available in the recent press release on growth and economic well-being.
HDI not only includes income generated from the direct involvement of households in the production of goods and services, but also any income received (minus payments made) related to the ownership of financial assets (or liabilities), government redistribution policies, and other current transfers. Overall, the three contributors to household disposable income that were most affected by COVID-19 induced restrictions were compensation of employees, gross mixed income3 and the receipt of social benefits from government. For this reason, it is worth looking at these components to better understand the diverging developments across countries, and to explain why household income outperformed GDP.
The main source of income for most households is wages and salaries. From mid-March, governments across the world initiated policy actions in an attempt to limit the spread of the virus, of which the most dramatic, from an economic point of view, concerned the closure of all non-essential businesses. As a result, significant portions of the population were not able to work for their regularly scheduled amount of time, if at all. This was especially true for industries such as accommodation and food services; arts, entertainment and recreation; and retail services. In some countries, government measures have been implemented to dampen any negative impacts on employment (e.g. providing employers with subsidies to keep employees on the payroll), however, all eight selected countries recorded declines in compensation of employees in the second quarter of 2020, ranging from -2.2% in Australia and the United Kingdom to -9.4% in France. These falls represent the largest quarterly declines for over 10 years and in some countries for the entire available time series.
Figure 2 displays the severity of the declines observed in the second quarter of 2020 by comparing them with the average quarterly growth recorded during the prior five years. The falls varied in severity depending on a range of factors, including the length of the forced closure, the level of service industries in the economy, as well as the amount of government support provided to businesses.
While government decisions to force non-essential businesses to close resulted in a dramatic decline in household’s primary income source, governments also took immediate action to limit the likely impact on household income. In addition to subsidies to employers to keep employees on the payroll, most governments also implemented policies to increase the amount of money being paid directly to households, in order to compensate those that had seen their wages or self-employed income decrease. Furthermore, some countries took the opportunity to increase already existing redistribution payments, such as those for the unemployed, low-income families, people with disabilities, etc. In a number of countries, this additional fiscal stimulus was undertaken regardless of whether or not the recipient had been explicitly affected by policies introduced to curb the impact of COVID-19.
Among the countries being analysed, the above policies were most evident in Canada, the United States, Japan, and Australia, where social benefits received in cash by the household sector increased by 86.7%, 76.4%, 50.8%,4 and 41.6% respectively in the second quarter 2020 (see Figure 3a). In the other countries, where governments initiated a more targeted stimulus response, a less pronounced but still historically strong growth rate in government payments to the household sector was observed, with France and Italy showing increases of 7.9% and 3.2% respectively, while the United Kingdom and Germany both reported a growth of 4.5% (see Figure 3b).
Figures 3a and 3b present the quarterly growth of social benefits received by the household sector since the third quarter of 2007. With the exception of the United Kingdom, which shows a rather volatile series, all other countries report very few large increases over the past ten years. There are some relatively large spikes, representing government stimulus payments in response to the 2008 financial crisis. However, in Australia, the United States, France and Germany, these increases are all smaller than those observed during the second quarter of 2020.
Despite the relatively limited negative, or in some cases major positive, impacts on household income, all countries recorded significant decreases in the level of household final consumption in the second quarter of 2020, with consumers less willing to spend or otherwise limited by store closures and restrictions to their movement. The resulting declines (even in current prices) were by far the largest on record, and in some countries, reduced household consumption to levels below those observed in 2007. Figure 4 shows that over the previous five years average quarterly growth in household final consumption in current prices was relatively minimal for all countries, ranging from very slight growth in Japan (0.1%) to 1.0% in the United States. In the second quarter of 2020, all of the selected countries showed a decline in current prices of at least (minus) 8.5%, with the United Kingdom recording the largest fall, by (minus) 23.3%.
Combining this large decline in spending and the relatively moderate falls, or even (significant) increases, in household income resulted in a surge in household saving. Figure 5 shows not only the historically high level of income being saved by the household sector during the second quarter of 2020, but also the striking profile of the increase when compared with the relatively stable historical series.
It is important to note that this saving estimate is an aggregate for the entire household sector and may not reflect the situation for all households. It is highly likely that certain segments of the household sector experienced no loss of income and reduced their expenditure, saving a large amount, while other households suffered significant falls in income while maintaining basic expenditures, eating into any available savings.
While households may have been able to consolidate their wealth due to substantial decreases in expenditure, the government sector had the opposite experience. In addition to the increased expenditure related to payments made directly to the household sector discussed earlier and shown in Figure 3, some countries also initiated policies to support enterprises, amongst others by subsidising the payroll of COVID-19 affected businesses. As these policies are intended as a mechanism to not only further support the level of household income but also to ensure that the employment relationship is maintained during the crisis, these payments are treated, in the system of national accounts, as a subsidy on production paid by government. While the percentage of the salary paid by these subsidies varied across countries, with some governments choosing to simply contribute a set monetary amount per employee and others opting for a more targeted approach, for the countries that implemented this policy, the size of these subsidies dwarfed normal levels of subsidies on production. In the second quarter of 2020, there was unprecedented quarterly growth for Australia (930.2%), the United Kingdom (206.0%), Canada (189.9%), and Germany (69.8%).5
The significant increases in government expenditure on subsidies to enterprises and payments made directly to households, combined with declines in tax revenues associated with lower production and consumption levels, has resulted in large deficits for the government sector in the second quarter of 2020. In order to finance these deficits, governments have been required to increase their debt levels, as shown in Figure 6.
In the second quarter of 2020, Canada recorded the highest increase (19.9 percentage points) in government debt-to-GDP ratio among the selected countries, while Germany recorded the lowest increase (6.9 percentage points). The United Kingdom and the Unites States also recorded marked increases, by 19.2 and 16.2 percentage points respectively, followed by France (15.8), Italy (13.6), Japan (12.3) and Australia (7.8). In level terms, at the end of the second quarter of 2020, Japan recorded the highest government debt ratio of 245.9%,6 followed by Italy (168.7%) and France (143.5%). Only Germany and Australia maintained government debt ratios below 100% of GDP.7
The long time series provided in Figure 6 helps to put the most recent results into perspective. During the 2008 financial crisis, governments’ indebtedness, as a percentage of GDP, increased by 20 percentage points from 2007-2010 for a majority of countries. However, the severity of the impact from the COVID-19 pandemic is clear from only one quarter, with increases in government debt-to-GDP ratios of 14 percentage points on average for the selected countries. A significant difference between the debt taken on now and during the 2008 financial crisis is the very low interest rates faced by governments for new loans, resulting in a significant reduction in the servicing costs associated with this increased debt. That being said, the debt burden on governments is likely to remain high even if GDP returns to pre-pandemic levels.
Household net disposable income: Total income received by households after deducting taxes on income and wealth and social contributions, and including monetary social benefits (such as unemployment benefits). This measure thus represents the amount left at the disposal of households for either consumption or saving. It is called “net” when amounts needed to replace capital assets (dwellings and equipment of unincorporated enterprises) are already deducted. In this analysis, gross disposable income, with no deduction in relation to the consumption of capital assets, is used for all countries except Japan (see footnote 1).
Compensation of employees: Compensation of employees is defined as the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period (2008 SNA, § 7.5).
Gross mixed income: The surplus accruing from production of goods and services by unincorporated enterprises owned by households; it implicitly contains an element of remuneration for work done by the owner, or other members of the household, that cannot be separately identified from the return on capital invested by the owner as an entrepreneur (2008 SNA, § 7.9).
Gross saving: Saving represents that part of disposable income (adjusted for the change in pension entitlements) that is not spent on final consumption goods and services (200 SNA, § 9.28).
General government debt: The concept of debt is the one adopted by the 2008 System of National Accounts (2008 SNA). According to this concept, debt is set equal to the sum of the following liability categories, whenever available / applicable in the financial balance sheet of the relevant sector: special drawing rights (AF12), currency and deposits (AF2), debt securities (AF3), loans (AF4), insurance, pension, and standardised guarantees (AF6), and other accounts payable (AF8). This definition differs from the definition of debt applied under the Maastricht Treaty for European countries. First, gross debt according to the Maastricht definition only includes currency and deposits (AF2), debt securities (AF3), and loans (AF4). Second, debt according to Maastricht definition is valued at nominal prices and not at market prices.
1. The selected countries comprise the G7 economies plus Australia. These countries were not only selected due to the availability of the relevant indicators, but also to provide a range of countries across different continents. Data was updated as of the 8th of December, 2020 and unless otherwise stated, the quarterly estimates are all current prices and seasonally adjusted. They are available at https://stats.oecd.org/.
2. Non-financial accounts data for the household sector for the second quarter of 2020 have not been provided to the OECD. Instead, the Japanese data for the household sector have been sourced from the Japanese Cabinet Office, publically available at the following site, https://www.esri.cao.go.jp/en/sna/household/household_top.html. In this respect, please note that Japanese household disposable income and household saving is presented on a net basis, while in the case of other countries it refers to gross estimates. The difference between the two estimates concerns consumption of fixed capital. Furthermore, Japanese numbers only cover the household sector, while for other countries it refers to both households and non-profit institutions serving households. Both conceptual differences are not expected to have a material impact on the analysis for the second quarter of 2020.
3. In the system of national accounts, mixed income relates to unincorporated enterprises, and concerns a combination of the income that can be attributed to the labour input of the owner and her/his family members, consumption of fixed capital, and a return on invested capital (2008 SNA, § 6.126).
4. The estimate for Japan is a combination of social benefits in cash received by households and net other current transfers received by the household sector, due to the Japanese Cabinet Office allocating stimulus payments made to the household sector in this categories.
5. Movement for Australia and Canada is taken from each country’s seasonally adjusted estimate. The estimates for Germany and the United Kingdom is a moving 4-quarter average, due to the absence of seasonally adjusted data.
6. Please note that for Japan and the United Kingdom, data refer to non-consolidated government debt, while for the other countries it refers to consolidated debt levels. The difference concerns the holdings of government debt by other parts of general government. Additionally, to improve comparability between countries, government debt levels have been adjusted to remove unfunded pension liabilities.
7. The government debt to GDP ratios presented will differ in this document compared with the recently published OECD economic outlook due to those estimates covering the entire 2020 year and including some forecast elements. Data in this statistical insight is entirely based on published debt and GDP levels, up to 2020 Q2.