UK Household Finances Improve – but opportunities missed.

UK households saw an improvement in their financial wellbeing in Q3, according to Alliance Trust’s UK Financial Reality Index. In the third quarter of 2012, the index increased from 61.3 to 87.8, its highest level since Q4 2009, driven by a significant improvement in real disposable income and strong equity market performance. Despite this, the headline index, and all three sub-indices, have been below the critical level of 100 for more than a year, indicating that conditions are weaker than the long term average.

Shona Dobbie, Chief Economist at the Alliance Trust, said, “Our index posted an encouraging increase during Q3, highlighting that financial conditions facing households in the UK are easing. However, the fact that the headline index and all three sub-indices are still below the critical level of 100 tells us that, despite this improvement, conditions remain weaker than the long term average. In Q3, the index was pushed higher by a relatively strong stock market performance and an improvement in real disposable income, but the economic background remains challenging and household budgets are still under some considerable pressure.

Our Financial Reality Index has proved to be a good predictor of general consumer spending patterns. The persistent weak level of overall financial conditions therefore points to consumer spending growth remaining at a relatively muted level as we move into 2013”. 

The main findings of the Q3 Financial Reality Index are:

  • The Economic Background Index increased from 65.3 to 74.5 but, although this index has now improved for two successive quarters, it remains the weakest of all three sub-indices. The increase was driven by a small decline in the unemployment rate and an improvement in the rate of delinquencies. Despite this improvement, the index has been below 100 for five successive quarters now, indicating that economic conditions facing households remain challenging.
  • The Household Budget Index increased from 61.3 to 88.8, taking it to its highest level since Q4 2009. Despite this gain, the index remains below the critical level of 100, as has been the case since the start of 2010. During Q3, the improvement in this index was driven by an increase in real disposable income, and a fall in the inflation rate attached to basic goods.
  • The Net Wealth Index increased from 57.4 to 99.5, recording the biggest improvement during Q3. This upwards move was driven by stronger equity market performance and a small gain in house prices. As a result, this index has risen to just below the critical level of 100, making it the strongest component of our Financial Reality Index.

Stephen Pett of Legacy Trusts said “Despite this minor improvement, things are still very hard for young people starting out, and The Family Bank still offers an essential way to benefit and safeguard future generations.”