Alliance Trust's Financial Reality Index, a bespoke measure of how well off consumers are, showed a stark deterioration in the last quarter of 2008 when most of the factors that make up consumers' financial wellbeing continued to worsen. The headline Financial Reality Index fell to just 34.5 - the lowest level since it began in 1997 - from 43.4 in the previous quarter, having been falling continuously since mid-2007.
Alliance Trust Research Centre analyses changes in the UK economic background, households' budgets and their net wealth to compile the index. In the last quarter, all three of these principal components were below the critical level of 100 for the first time since the second quarter of 2005.
Shona Dobbie, head of the Research Centre, said, “Consumers are now facing a triple whammy as their wealth, their budgets and the economic factors around them are all now in the doldrums. In the last quarter we saw the sharpest change in fortunes for the economic background because unemployment increased to around 6% during the quarter, from 5.2%, and GDP growth slowed to the weakest pace in the 12-year history of our survey.
"Even though there has been a tiny improvement in the extremely strained situation of household budgets because slightly lower inflation is boosting real income levels, consumers' financial situation remains very uncomfortable. One effect of this is that consumers are facing up to their financial reality by reining in spending. We expect our Financial Reality Index to continue to decline further in early 2009 due to rising unemployment and the possibility that consumer spending might even start to turn negative for the first time since 1992. Overall the picture for UK households remains bleak with almost all the key figures that combine to decide their financial wellbeing now deteriorating."
