Rise in Household Wealth to Boost GDP

Posted on February 11, 2013

With the increase in home and equity prices, Capital Economics suggests net household wealth may be on its way to rising above pre-recession levels later this year, which will lead to a boost to GDP.

“This wealth effect should continue to boost the economy in future years too, although by not as much,” the analytics firm stated in a recent report.

Capital Economics forecasts the S&P 500 equity price index will end 2013 close to the current level of 1,500 and expects home prices to rise in the neighborhood of 5 percent. In turn, the growth in household wealth, the firms says, could lift GDP by around 0.7 percent.

“A rise in the S&P 500 index to 1,600 in 2014 and a further 5% gain in house prices may add 0.5% next year too,” the report added.

The most recent Flow of Funds report for Q3 2012 showed net household wealth grew to about $64.7 trillion. Capital Economics says the Q4 report, due March 7, is likely to show an increase of household wealth to around $65.1 trillion. At the end of 2007, net worth reached $66 trillion.

“Wealth would have increased by $4.8trn during last year as a whole, leaving it close to the pre-recession peak reached five years ago,” the firm stated.

The firm largely attributed the rise in wealth to the increase in stock market prices, with home value improvements being secondary.

“The rise in net wealth last year was mainly due to the 17% increase in equity prices boosting the value of equity-related assets by $3.6trn and, to a lesser extent, a result of the 8% gain in house prices raising the value of real estate assets by $1.0trn,” Capital Economics explained.

Though, the firm noted a rise in home values actually tends to lead to a larger increase in consumption spending compared to a rise in equity wealth.

With the added boost from increasing wealth, Capital Economics forecasts GDP will rise by 2 percent this year and by 2.5 percent next year.

“Our growth forecasts will need to be changed only if asset prices rise by much more or fall significantly,” the firm stated.

Esther Cho, DSNews.com.