1 November 2007

 

FIRST SIGNS OF BELT TIGHTENING ‘TOO LITTLE TOO LATE’ TO REPAIR

A YEAR OF RUNAWAY SPENDING, WARNS ALLIANCE TRUST

 

Although the latest official figures show the first small dip in UK household spending since its surge began early in 2006, Alliance Trust Research Centre warns many families who stepped up their spending during this period will need to budget much harder and longer to bring themselves back in line with underlying financial reality. 

 

The research unit of the UK’s largest generalist investment trust today published an update of its 10 year Financial Reality Index study into the real financial state of UK households.  The headline findings, based on Q3 (July-September) data, are that:

 

·      The Financial Reality Index remains below the critical 100 level for a record 13th quarter, pulled down by household budget pressures.

·         Household spending recently showed a small decrease, bringing it closer in line with financial reality.

·      Household budgets were heavily squeezed through the summer months, due to high council taxes, low real earnings and increasing mortgage payments.

·      Net household wealth suffered as stock market jitters and rising debt weighed heavily on families.

·      The economic background remained healthy with low unemployment and strong economic growth.  

·      Alliance Trust Research Centre expects consumer growth to slow further, amid early signs of a softening in spending.

 

The chart below shows how consumer spending has increased since the first quarter of 2006 in contrast to the worsening financial reality. Alliance Trust urges families to have a careful look at the impact of the last 18 months on their finances, and warns there are clear downside risks to consumption moving forward.

 

 

Shona Dobbie, Head of Alliance Trust Research Centre, said, “UK households have been too short-sighted and have lost track of financial reality. We continue to remain puzzled that households’ actual spending does not reflect the underlying fundamentals. Consumers remain reluctant, in the face of growing evidence, to pull back from their elongated spending binge. Low real earnings growth, higher mortgage repayments and hefty council taxes, to name just a handful of issues, all suggest that households should take a much needed reality check.”

 

Dobbie said, “Although we have seen a recent improvement in overall financial wellbeing of UK households, this is largely a result of underlying economic background conditions and is certainly no cause for complacency. Households that have routinely overstretched themselves through the past year or so will find it a struggle bringing their finances back under firm control, let alone dealing with the deficit left by this flight from reality. We continue to highlight that many financial pressures, such as increasing mortgage repayments, are challenging households at this time. The prospect of mortgage resets for some households in the coming months will certainly not be welcomed, as this has the potential to add to already stretched budget problems. We are growing increasingly concerned that rising debt levels and slowing growth in net wealth will force a more sustained and pronounced slowdown in consumption.”

 

Alliance Trust Research Centre’s Financial Reality Index is based on a ten year quarterly analysis of 11 underlying national and household indicators, which together have proved a reliable ongoing predictor of consumer financial confidence and willingness to spend. The study suggests that consumer spending remains too high, given the low level of the Financial Reality Index.

 

The Financial Reality Index rose to 88.6 in the third quarter, from 82.0 in the second quarter, but has now been below the critical level of 100 for a record 13 consecutive quarters. Two of the three underlying sub-indices improved. The Economic Background Index increased from 133.6, to 159.2, its strongest reading in over 7 years. The Household Budget Index rose marginally from 39.6, to 43.5, but still remains significantly below the critical level of 100. The Net Wealth Index slipped below 100, dropping from 101.1 to 93.3. 

 

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Alliance Trust’s full report on the Financial Reality Index is available on www.alliancetrust.co.uk  You can obtain a copy of the report by emailing contact@alliancetrust.co.uk or phoning 08000 326323.

 

 

 

 

 

Notes to editors

1.       Alliance Trust is an international investment and financial services group. It is headed by Alliance Trust PLC, the largest generalist investment trust company listed on the London Stock Exchange. Through its subsidiaries, Alliance Trust offers investment dealing, self-invested personal pensions and a choice of investment wrappers.

 

2.       The Research Centre is part of Alliance Trust and was formed to carry out economic and social analysis to deepen our understanding of economies, markets and socio-economic issues.