Economic fears rein in spending

Falling house prices and a rise in bills and mortgage costs are now starting to bring UK consumer spending under the cosh.

Alliance Trust research points to household spending falling in the coming year – as debt-fuelled consumption of the last two years comes to a grinding halt.

Shona Dobbie, head of Alliance Trust Research Centre, said: "Consumers are starting to feel the pinch of financial reality, and are showing signs of reining in spending.

"Our measure of consumer wellbeing shows households are facing increased headwinds in terms of their finances, as food and energy prices move higher, house price growth slows and equity markets decline.

"These combined factors give us a bleak view of consumer spending and confidence for the next 12 months."

She added further pressures were coming for the 1.4 million households coming off fixed-rate mortgage deals in 2008 and find repayments rocket amid the credit crunch.

"This will have a huge impact on people's finances so we expect to see a further decline in household expenditure closely aligned with financial reality over the next year."

She went on to explain over the last two years debt levels have increased as household spending rose, despite a worsening financial reality; however, this trend is coming to an end.

Further falls in equity prices and property values could also keep consumers hands firmly in their pockets over the coming year.

Alliance Trust's Financial Reality Index has now slumped to its lowest level in 11 years as household budgets are firmly squeezed.

Daniel Barnes