‘Financial Reality’ has plunged to record low

Alliance Trust Research Centre's Financial Reality Index reveals that the financial well-being of UK households has hit its worst ever level during its 11 year study. The latest report that reveals families' financial reality in the second quarter of this year warns that household consumption will have to continue to slow over the remainder of 2008 in order to remain in line with the financial reality facing UK households.

During the first half of 2008, household consumption continued to grow slightly, even though food and energy prices rose, debt levels increased and house price growth slowed. This continued spending created an even worse underlying financial reality for the UK consumer. However, the latest results show that the credit crunch has finally hit consumer spending, as high mortgage payments and council tax bills are over-stretching households whose real earnings which aren't keeping track with inflation. This is leaving families feeling much poorer and they are cutting back on any non-essential spending.

The Financial Reality Index is a bespoke gauge of consumers' real financial well-being. It collates and analyses findings across a range of economic variables, from wage inflation and employment statistics to mortgage repayments and council tax. This quarter the index fell to its lowest point since the study began over 11 years ago.

Financial Reality Index vs Household Expenditure

Sources: ONS, DCLG, CML, ECOWIN and Inhouse Analysis

As well as a record low in consumers' household budgets, the second quarter of 2008 also brings a record low in net wealth conditions. The sharp cooling in house prices and high levels of debt have been a huge burden on household net wealth. With little change in the rate of unemployment the labour market has continued to hold up well so far in 2008 but the outlook looks set to turn and the level of unemployment is expected to rise.

Head of Alliance Trust Research Centre Shona Dobbie said, "Consumers are currently facing the worst financial reality ever in the 11 years of our study. All three of our indexed measurements* of consumer well-being have decreased over the past quarter. Households now have to spend more on their mortgage repayments and council tax bills, combined with the fact that their real earnings are failing to keep up with inflation, and so they are feeling poorer and having to cut back in some areas of spending. These bleak conditions are set to get worse for the rest of the year. The labour market has remained fairly strong up until now, but we predict that this will soften over the second half of 2008 as the number of people claiming unemployment benefit continues to rise."

"The credit crunch has now fully started to hit consumers and net wealth conditions are at a record low. As predicted last quarter, equity markets and property prices have continued to fall and, combined with high levels of consumer debt, this has caused the Financial Reality Index to fall to its lowest ever level."