(January 2019)

The Global Picture of Household Spending Power 2018

 

Just 9 countries account for two thirds of the total value of household incomes across the 108 countries included in this analysis (and which account for 88% of the world’s population). Given that Private Consumption Expenditure (which by definition is a function of household incomes) on average accounts for 62% of a country’s GDP, what happens in these 9 countries is critical to the global economy. USA is the largest as is to be expected, followed by China, Japan and Germany.  Then it is the United Kingdom, France Italy and Brazil.

In terms of average household income rather than total household income of all households, the top quartile (29 countries) average income of US$71,915, with the lowest in this segment having an income of US$38,000. 

South America, Russia, Mexico, and China dominate the second tier.  That is, countries with an average household income between US$16,000 and US$33,000. 

Africa and South Asia are mainly in the lowest income segment – that is an average household income below US$ 6,000 pa. 


 Household incomes are notoriously difficult to measure reliably for a variety of reasons explained at the end of this article.  Global Demographics use a constrained model which ensures that the basic parameters are satisfied (e.g. average income exceeds average expenditure) and while it is subject to flaws provides a defensible measure of what funds the typical household has available each year across countries.

A description of the methodology used to generate the estimates for this Insight is given at the end of the document.

Using that approach we can show the relative income level of households in each of the 108 countries we cover and how this varies globally.

We have divided the 108 countries into 4 groups. 

  • High income – being those with an average household income in excess of US$38,000 pa (29 countries). They account for 432 million households (21% of a total of 2.2 billion households) and 61% of total earned income.  They are concentrated in North America, Western Europe, North East Asia and Australasia.

  • Upper middle income – households whose income fall between US$38,000 and US$16,000 pa (25 countries). This second tier is important as it has countries with large populations – specifically China. Brazil and Russia.  In total this income segment accounts for one third of all households in the 108 countries covered in this analysis and 27% of all household income.

  • Lower Middle income – households whose income falls between US$16,000 and US$6,000 (27 countries)

  • Low Income- countries where average household income is below US$6,000. This segment accounts for 31% of all households in the total country set but just 5% of all household income.  A situation that is exacerbated by poor education and health services and unequal opportunity which inhibit the ability of the population to move out of such poverty.

The median household income globally is US$15,900 pa   That is, half the households in the 108 counties covered in this analysis earn more than this figure, and half less.

These groups are plotted in Figure 1.   The darkest blue is the highest income and light blue is the lowest.  (those in light grey are countries for which data is not currently available in our database).


Figure 1: The Distribution of Countries by Average Household Income in 2018.
[Dark blue is highest income, Light blue is the lowest income, Blank is no data]

Fig 1.jpg
 

 What Figure 1 demonstrates is how geographically concentrated the higher income areas of the world are – North America, Western Europe, Australasia and North East Asia (Japan, Taiwan and South Korea).

Large parts of South America, (Brazil, Argentina and Peru) together with China, Russia and Mexico fall into the second ties.  This is significant as China, Brazil and Russia particularly have large populations.

Finally, South Asia (India, Pakistan, and Bangladesh) and most of the African Continent fall into the lowest income segments.   These are also the areas with the fastest population growth and lowest education levels.

Figure 2 takes this analysis a step further by multiplying the average household income by the number of households to give a measure of each country’s total consumer purchasing power.

Figure 2 shows just the top 20 countries. They account for 82% of the total household incomes of the 108 countries covered in this analysis.  Not surprisingly the United States of America dominates being both high income and having a large population and number of households.  China comes second because while its average household income as estimated by our method is just 15% of that of the USA, it has four times as many households.  Japan, again high income and a relatively large number of households is third.  There after the contribution of individual countries is quite small- and by the 20th country, Switzerland, the increment is 1%.

Figure 2: The relative importance of individual countries to total consumer spending power 2018

Fig 2.jpg

Total Consumer Spending power of the 108 countries is US$49,890 Bn so the United States of America Accounts for 26% and China 15%.  Add Japan and half the world’s spending power is accounted for.

Clearly, given these countries are accounting for a large amount of household incomes (and by implication consumption) and what happens to them over the next few years is critical to the global economy.  What they consume other countries export.  With China Slowing, Germany potentially already in recession India and the USA are perhaps very important to global health in the medium term


Measuring annual household income

A Methodology Note

Measuring household income is difficult and unreliable.  The usual method is to do what is generally called a ‘Household Income and Expenditure Survey’. This is done by most countries with a viable government but with widely varying degrees of reliability.  It suffers from the normal issues of social research – that is sample validity and size, representation, respondent error, and analysis error.  This is not to say these studies are totally unreliable – that is not the case at all – but rather they are at best a good indicator only.

There is also the issue of what is ‘income’?  Is it earned income, does it include social payments, capital gains (including mortgaging the increased value of a household), credit?  A credit card increases the spending power of a household by the amount of the credit limit.  Yes, it must be paid back, but it is an ongoing continuous cash float.

Because of this uncertainty around this measure, Global Demographics Limited has taken a different approach.  A good measure of average household expenditure is provided by dividing the Private Consumption Expenditure component of total GDP by the number of households.  It pays to adjust this slightly to allow for expenditure by charitable institutions.  Typically, we lower the Private Consumption Expenditure amount by seven per cent to allow for charitable institutions.  It is also assumed expenditure by tourists is offset by overseas expenditure of residents.  Again, an assumption but there is no easy way to define the amounts so spent.

As Private Consumption Expenditure (PCE) is a component of total GDP it is subject to some rigour in method and data collection.  In addition, as the total number of households is an easy variable to measure that is also relatively reliable.  So total PCE divided by total households gives a relatively reliable measure of the average expenditure of households in the country which by definition is also the medium-term definition of minimum household income

The next step is to determine the likely maximum funds available to households before tax and savings as well as expenditure.  Here we resort to the Household Income and Expenditure Survey, where available. Some give not only expenditure but also gross income.  Global Demographics divides that by average number of workers in the household to get the average income (wage) per employed person and that is compared with the overall GDP per worker.  Using the distribution of this variable across 50 countries where this data is available there is a 95% probability that the average wage per worker will be less than 70% of GDP per worker.  So, 70% of GDP per worker provides a likely maximum for the average worker wage per household – and that multiplied by number of workers gives the likely maximum accessible funds for a household in a year.

The range between the minimum (Private Consumption Expenditure  per household) and the maximum (70% of GDP per worker times number of workers in the household) is actually quite small.  Furthermore, given most households pay tax and/or save this means the true available funds must be greater than the minimum, and similarly not all countries pay at 70% of GDP meaning the likely maximum is lower the potential range is less. So Global Demographics Ltd use the average of the two numbers meaning the likely error in available income is plus or minus 5%.

Yes, this process can be debated but it does nonetheless mean that there is some consistency between estimated available income and total Private Consumption Expenditure as well as wages.  Using Household Income and expenditure surveys alone under performs on this criteria.