Alliance Trust PLC : UK households continue to face challenging financial conditions in Q1

20 April 2012

UK consumers saw another small improvement in their financial wellbeing in Q1, according to Alliance Trust's UK Financial Reality Index. In the first quarter of 2012, the index rose from 62.1 to 66.4. Yet despite this, the index and all three sub-indices remain well below the critical level of 100, indicating that conditions are weaker than the long term average. Ongoing weak GDP growth, rising unemployment, high levels of consumer debt and a continued loss of purchasing power, persistently weigh on the financial conditions facing households.
Linsey Thomson, Senior Economic Analyst at the Alliance Trust Economic Research Centre, said, "Our index posted another small increase in Q1 but remains well below the critical level of 100, indicating that financial conditions are still weaker than the long term average. In Q1, we saw another fall in the economic background index due to further increases in unemployment and lacklustre economic growth. The improvement in overall financial conditions was driven by the net wealth index, primarily due to stronger equity markets and a rise in house prices. On top of this, the household budget index also rose in Q1, however, muted wage growth means that households continue to suffer a loss of purchasing power.

Our Financial Reality Index has proved to be a good indicator of general consumer spending patterns. The persistent weak level of financial conditions therefore points to continued muted consumer spending growth as we move through 2012".

Source: Reuters Ecowin and Inhouse Analysis

The main findings of the Q1 Financial Reality Index are:
• The economic background component fell from 69.9 to 63.4, recording its third consecutive quarterly decline, making this the weakest component of our Financial Reality Index. This index has been below 100 for three quarters now, indicating that economic conditions facing households are challenging. Over the quarter, the main drag came from further increases in unemployment.
• The household budget index rose from 61.7 to 67.5, however, the index has now been below the critical level of 100 since the start of 2010. In Q1, lower inflation resulted in lower basic goods price inflation and this also helped disposable income. Nevertheless, with inflation still higher than wage growth, households continue to suffer negative real earnings growth and this is keeping household budgets under pressure.
• The net wealth index increased from 54.9 to 67.5 but remains below the critical level of 100 for the seventh consecutive quarter. A rise in the equity market index and a further improvement in house prices were the main drivers of the increase during Q1. However, high levels of household debt continue to weigh heavily on this sub-index.
The full Financial Reality Index factsheet is available at www.alliancetrust.co.uk/research

RLM Finsbury

1. Alliance Trust PLC is a self-managed investment company with investment trust status. It is one of the largest generalist UK investment trusts by market value on the London Stock Exchange.
2. The Economic 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.

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