‘Actual Individual Consumption’ in Europe. A sensible indicator. Three graphs.

Is total German consumption really growing that slowly? In a tweet, Erwan Mahé (@ThalersCorner) expressed his surprise and confusion about the slow increase of private consumer expenditure in Germany, despite robust job growth and relatively low unemployment (and sizeable increases of real wages!). I do share his surprise and confusion, but the world starts to make more sense when we do not just look at household expenditure but at ‘Actual Individual Consumption’ (AIC). This broader indicator of consumption increased in fact quite much in Germany, thanks to robust increases in especially services provided by the government (health)! AIC is defined by Eurostat (who also estimates and calculates it) as:

Actual individual consumption (AIC) … refers to all goods and services actually consumed by households. It encompasses consumer goods and services purchased directly by households, as well as services provided by non-profit institutions (churches, unions, sport clubs – M.K.) and the government for individual consumption (e.g., health and education services). In international comparisons, the term is usually preferred over the narrower concept of household consumption, because the latter is influenced by the extent to which non-profit institutions and general government act as service providers. Although GDP per capita is an important and widely used indicator of countries’ level of economic welfare, consumption per capita may be more useful for comparing the relative welfare of consumers across various countries. AIC is, in practice, by far the biggest expenditure component of GDP.

Differences in the development of AIC between for instance the Netherlands and Germany go a long way to explain why the Netherlands grew so slowly after 2008; the developments in Southern Europe are of course indicative for a massive decline in household welfare. As such, AIC is an important step ahead on the road to a more encompassing measure of welfare than just private consumption, services provided by the government are however alas ignored by neoclassical macro-economists!