In the first quarter of 2011, Alliance Trust's UK Financial Reality Index fell from 80.9 to 75.8, driven by declines in both the economic background and net wealth components. GDP growth, employment, house prices and the stock market all recorded declines in Q1, pulling the headline index further below the critical level of 100. The household budget index was the only component to record an increase in Q1 however it still remains below its long term average level.
Shona Dobbie, head of the Alliance Trust Research Centre, said, "The decline in our index in Q1 is disappointing as it more than reverses the gain recorded in Q4 and takes the index further away from the critical level of 100. Households continue to face a number of headwinds, including elevated unemployment, continued rises in basic costs and high debt levels.
“On top of this, economic activity slowed, house prices declined further and stock market performance weakened. All of these factors suggest that household spending will remain muted in the months ahead, while further pressure on households is also likely to come in the form of cuts in fiscal spending which will put more pressure on household budgets.”
The main findings of the first quarter Financial Reality Index are:
- The economic background component fell from 104.2 to 93.3 in Q1, taking the index back below the critical level of 100. In Q4, growth in economic activity weakened and the unemployment rate increased further, pushing the index back below its long term average.
- The household budget component increased from 59.0 to 61.2, the only component to record an increase in Q1. Despite this, the index remains below its long term average and is still the weakest component of our Financial Reality index. Subdued real earnings and an ongoing rise in basic costs continue to keep the household budget index muted.
- The net wealth index declined for the fourth successive quarter, from 94.3 to 82.4. The deterioration in this index over the quarter was due to further weakness in house prices together with weaker stock market performance.
