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Consumption, Income and Wealth - Part 1

Over the last 10-15 years, Danish households have increased their net wealth as a ratio of income. At the same time, they have also expanded their balance sheets, i.e. both assets and liabilities. This article examines how net wealth and its composition have influenced fluctuations in private consumption. The effects of financial flows from household wealth on household income and hence the scope for consumption are analysed. The analyses show e.g. that house prices were the most important factor behind the surge in consumption during the boom in 2004-07 and the subsequent sharp fall. Moreover, it is demonstrated that the falling interest rates in recent years – in response to the marked international economic slowdown – have contributed substantially to cushioning private consumption.