Household income growth
Another determinant of private consumption growth rates is the growth rate of net household
disposable income, and it is quite possible that it is a more important determinant of
private consumption growth rates than GDP growth rates because households finance their
consumption primarily from net household disposable income. Table 1 shows data on the
average annual real growth rate of net household disposable income (deflated by the price
deflator for private consumption) in the G7 countries during the 2002–2007 period in
addition to showing data on the average annual real growth rates of private consumption
and GDP during the same time period, and as can be seen from this table, there is a high
correlation between GDP growth rates and household income growth rates, with the two
being roughly equal in many countries including France (2.00 vs. 1.94 percent) and the
United States (2.75 vs. 2.61 percent).
However, there are some notable exceptions: the average annual household income
growth rate was considerably higher than the average annual GDP growth rate (3.52 vs.
2.61 percent) in Canada during the 2002–2007 period, and the fact that the average annual
private consumption growth rate was higher than the average annual GDP growth rate in
Canada (3.74 vs. 2.61 percent) during the 2002–2007 period can be explained by the fact that the average household income growth rate was higher than the average GDP growth
rate in that country during this period.
Conversely, the average annual household income growth rate was considerably lower
than the average annual GDP growth rate in Germany (0.40 vs. 1.55 percent) and Japan
(1.00 vs. 2.10 percent) during the 2002–2007 period, and the fact that the average annual
private consumption growth rate was lower than the average annual GDP growth rate in
Germany (0.33 vs. 1.56 percent) and Japan (1.30 vs. 2.10 percent) during the 2002–2007
period can be explained by the fact that the average annual household income growth
rate was lower than the average annual GDP growth rate in these countries during this
period. Thus, not surprisingly, household income growth rates appear to be much better at
explaining private consumption growth rates than GDP growth rates.