Are we really wealthier than before the Covid-19 pandemic?

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by Shaun Richards

Yesterday brought news that will have brought a beaming smile to the person responsible for the morning meeting at the Bank of England. They will have been able to leave all the house copies of the Financial Times open at this page.

UK household wealth reaches record high despite economic hit from Covid

Such news will have put Governor Andrew Bailey in a good mood as he considers the Christmas bonus season at the Bank. Wealth effects are a key objective of the Bank of England and he will have considered it a masterly stroke to be in such a position. He may even have instructed that the tea trolley will have especially nice cake on it.

What is going on here?

The Office for National Statistics has been calculating the net worth of the UK and have decided it is higher than they thought.

The UK’s net worth was revised upwards by £0.2 trillion since the preliminary estimate, to £10.7 trillion in 2020, an average of £159,000 per person.

An interesting move as £200 billion is not the sort of thing you leave lying around under the sofa is it? What we are actually seeing is that growth which was already strong has been revised even higher.

Growth in the UK’s net worth was revised up by 0.6 percentage points to 5.0% in 2020 since the preliminary estimate; this surpassed the post-2008 global economic downturn average growth of 4.3%.

It is hard not too have a wry smile at what is considered to be the cause here.

Following the slight fall in 2019, the UK’s net worth grew by £0.5 trillion to £10.7 trillion in 2020. This ­­­was the strongest growth since 2016, predominantly driven by an increase in the value of non-produced assets which almost entirely consist of land.

Ah so land is more valuable. That reminds me of the words of Mark Twain.

Buy land, they’re not making it anymore.

How on earth do they come to the conclusion that UK land is more valuable? It puts another nuance on a debate I have been involved in for more than a decade now. You see if you push to have house prices in our inflation measures one official push back is that you cannot include the land. That sort of logic means that rises in the price of land are all wealth effects. How convenient! Also as to the measurement there is an enormous amount of effort on measuring house prices but there are sometimes considerable differences between the measures. So there must be quite considerable doubt about land prices.

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Putting it another way things we can do nothing or little about surged.

 Both non-produced and financial assets made large contributions towards the UK’s growth in net worth during 2020 at 78.8% and 12.5%, respectively.

Whereas things we actually do, not so much.

Produced assets grew by 0.9% in 2020, which was the weakest growth since 2010, and accounted for 8.7% of the growth in the UK’s net worth.

Is it not revealing that we had the weakest growth since 2010 in things we actually do.

Household Wealth

Apparently we all did rather well so I hope that you enjoyed it.

Household net worth grew to £11.2 trillion in 2020, an increase of 8.4%. This was the second highest growth since the 2008 global economic downturn and, notably, was marginally below the pre-downturn average growth rate of 8.5%.

By now you will not be surprised by the leader of the pack.

Land contributed to 40.1% of growth in households’ net worth, which was driven by a 7.3% increase in average house prices. This rise was likely to have been affected by the reduction in stamp duty rates.

Okay and?

Similarly, “insurance, pension and standardised guarantee schemes” accounted for 39.7% of the growth in households’ net worth, and has been revised up since the preliminary estimate because of methodological changes included in Blue Book 2021

Ah so the same amounts now make us wealthier?

This growth was mainly driven by the increase in the value of defined benefit pension schemes, which resulted from historically low gilt yields.

This bit will have been met by beaming smiles at the Bank of England as they have not only ramped the value of some pension schemes they have ramped their own. But there is a catch because the amount received is the same. Whereas those with pension pots face worse annuity rates but that does not get measured.

Another factor is that via the various Furlough Schemes the government gave some people money.

“Currency and deposits” contributed 21.5% of the growth in households’ net worth. Increases in bank deposits were consistent with a sharp increase in the household savings ratio, which reached its highest level on record in 2020.

The Government

In essence it is the flip side of what we have just noted.

General government net worth fell by £445 billion in 2020 to minus £1,494 billion, the largest annual fall recorded. Government financial liabilities increased significantly and were consistent with the increases in current government expenditure because of the coronavirus (COVID-19) pandemic.

Financial Net Worth

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Frankly this does not to be worth the paper it is written on.

The UK’s financial net worth increased by £63 billion. This remained negative at minus £0.5 trillion in 2020, meaning the value of the UK’s financial liabilities continued to exceed the value of financial assets.

There will be so many value judgements and assumptions in any such calculation.

Comment

There is a danger in assuming that because you can measure something it is a useful number. This gets worse when the number supports what has been and indeed still is official policy. The Bank of England has gone to enormous efforts to pump up asset prices with Bank Rate at 0.1% a programme of £895 billion of bond purchases which is nearly complete. Then of course the Term Funding Scheme to make sure banks can price mortgages ever more cheaply and pump up house prices even more.

The first issue is whether we can measure these numbers with any accuracy and the answer is usually no. The next issue is in fact that the numbers such as they are often represent a transfer from elsewhere which is often not measured. For example if pension schemes are more valuable and we are paying for them ( via taxes for example in the case of public-sector pensions) we seem to be missing the future liability.

Also there is the issue of inflation which is completely ignored as many of the rising asset values are inflation for younger people. Let me start with the issue of housing.

New RF report: Four-in-five (80 per cent) non-home owning 25-34-years-olds lack the required savings and earnings levels to be able to buy a typical first-time buyer home in their region  ( Resolution Foundation )

Then there is the issue of pensions where defined benefits schemes have been disappearing in the private sector and downgraded in the public one. Those who pay into a pension pot see it buying ever less in terms of an annuity. So there is a type of inflation here too.

What is happening is that once you look under the surface much of this is transfers from one sector to another rather than gains outright but only one side is recorded. Also how do you ever benefit from it as how do you sell the housing stock of the UK or all equity holdings?

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