Eleven-year study confirms - we've never had it so bad

With Britain's economy almost definitely in recession, Alliance Trust's ‘Financial Reality Index' shows that the third quarter of 2008 has seen the UK's household finances deteriorate to a record low. The sharpest decline has been in the household wealth index that dropped sharply to end the quarter as the greatest drag on consumer's financial reality. But with financial reality now looking its bleakest in over a decade, consumers are finally taking action by drastically reducing their spending.

The Financial Reality Index, which is in its 11th year, is calculated by the Alliance Trust Research Centre. It looks at a range of indicators, which together have proved a reliable ongoing predictor of consumer financial confidence and willingness to spend. These are grouped into the three key components of financial reality - household budget, economic background and household wealth.

Financial Reality Index - Q3 key findings:

Throughout Q3 2008, the Financial Reality Index continued its downward trend towards a record low, well below the critical level of 100

Q2 saw a sharp slowdown in household spending, bringing consumer expenditure more in line with ‘Financial Reality'

Falling house and equity prices have drastically reduced our index of household net wealth to a record low

Consumers are increasingly struggling to make ends meet in an effort to maintain their existing lifestyle as rising inflation and utility bills take their toll

Consumer spending continues to slow as financial pressures on households make a further impact on expenditure

The Financial Reality Index is based on three sub-groups, whose components collectively impact on consumer financial wellbeing and affect confidence and therefore willingness to spend.

Net Wealth - Dropped to a new record low in Q1, falling from 41.5 to 6.9

The net wealth index is now the weakest component of the Financial Reality Index after dropping by 34.6 points over the last quarter. The largest drag on the index came from falling house and equity prices which are drastically reducing the net wealth of households. Our index shows that house prices are falling at the fastest pace in the history of our survey and equity prices are at their lowest since Q2 2003.

Economic Background - Slipped from 122.6 to 114.0

The economic background is the only component of the Alliance Trust Financial Reality Index to remain above the long term average of 100, despite the fact that its fourth consecutive quarterly decline was posted in Q3 2008. Rising unemployment and slowing GDP growth took the economic index to its lowest since Q2 2006.

Household Budget - Dropped from 31.9 to a record low 22.9

As a result of rising prices for basic goods and falling real earnings, this index has been consistently below the critical level of 100 since Q3 2002. In particular the recent gas and electricity price hikes have pushed up basic costs and this is reflected in the fact that inflation for basic goods has jumped to 15%. These headwinds pushed components measuring basic costs and real earnings to record lows in Q3 2008.

Shona Dobbie, Head of the Alliance Trust Research Centre comments: "Our Financial Reality Index shows very clearly how greatly the drop in household wealth over the last quarter has hit consumers' financial wellbeing. Sharp falls in house prices and share prices mean it is the household wealth index that performed worst last quarter, alongside the other two key factors that are families' budgets and the economy. Poor figures across the board in all three categories mean that consumers are now facing the worst financial reality in the course of our 11 year study. "

"Since the launch of our index, 11 years ago, we have seen a very close relationship between consumer spending and financial reality. Over the last three years however, this trend has been affected by consumers continuing to spend despite increasingly worsening financial circumstances.

"We are now at a point where we see signs that consumers are catching up with their financial reality and that they are bringing spending back in line with their means. Over the coming months and quarters, we expect this trend to continue."