An analysis of the different categories of households and forms of consumption

In 2018 the purchasing power of households’ gross disposable income (GDI) fluctuated greatly from one quarter to the next, falling at the start of the year and growing toward the end, particularly as a result of the fiscal calendar. At the same time, household consumption was relatively resilient in Q1 2018 but did not keep pace with the increase in income in Q4. The sub-annual trajectory of the savings ratio of households, i.e. that portion of their income which is not spent on consumption, fluctuated significantly as a result. In order to comprehend these variations, this Special Analysis proposes to examine the links between income and consumption, with reference to the standard of living of households and the nature of their expenditure.

Over the long term, the structure of both income and consumption has changed. Firstly, the socio-fiscal system appears to have become increasingly committed to the principle of redistribution, increasing the proportion of income which comes from social benefits but also, in return, ramping up the scale of compulsory contributions. As such, quarterly fluctuations in income are now more sensitive to variations in taxes and social contributions. The structure of consumption has also evolved, in favour of forms of expenditure which are less sensitive to short-term variations in income, particularly expenditure defined as “pre-committed” (compulsory expenditure, such as housing costs).

The analysis can be refined down to the different categories of households, specifically their standard of living. The 20% of households with the lowest income are more dependent on social transfers for their income, and a large share of their consumption is devoted to expenses which cannot easily be avoided. At the other end of the scale, the 20% of wealthiest households live primarily on earned income and property income; a greater share of their consumption goes on “discretionary” expenditure (leisure activities, accommodation and restaurants, capital goods etc.).

This Special Analysis applies a dual analytical framework (household category and type of consumption) to the links between income and consumption. We thus constructed various error correction models, arriving at a model based on types of consumption, then broad categories of expenditure depending on their sensitivity to income level (pre-committed, non-discretionary and discretionary spending). Aggregating these forecasts for each type of consumption appears to be more effective than using a traditional equation designed to study total consumption.

The results confirm the importance of forms of expenditure which are sensitive to variations in purchasing power and external factors affecting household expenditure when it comes to understanding the short-term fluctuations of aggregated consumption. In 2018, discounting exceptional short-term factors, the relative sluggishness of consumption growth could be explained by the time it takes for household consumption to adapt, particularly consumption among lower-income households, on account of the nature of their expenditure and the delayed effects on purchasing power.