The financial well being of UK households has plunged to its worst level in 11 years, according to Alliance Trust.

The Alliance Trust Financial Reality Index warns that household consumption will have to continue to slow over the remainder of 2008 in order to remain in line with the financial reality facing UK households.

During the first half of 2008, household consumption continued to grow slowly, despite rises in the cost of food and energy and, according to Alliance Trust, this continued spending has created an even worse underlying financial reality for the UK consumer.

As well as a record low in consumers’ household budgets, the second quarter of 2008 also brings a smaller record trough in net wealth conditions.

The sharp cooling in house prices and high levels of debt have been a huge burden on household net wealth.

With little change in the rate of unemployment, Alliance Trust argues that the labour market has continued to hold up well so far in 2008 but the outlook looks set to turn and the level of unemployment is set to rise.

Shona Dobbie, head of the Alliance Trust Research Centre, says consumers are currently facing the worst financial situation in the 11 years they have conducted the study and these bleak conditions are set to get worse for the rest of the year. ‘The labour market has remained fairly strong up until now, but we predict that this will soften over the second half of 2008 as the number of people claiming unemployment benefit continues to rise.

‘The credit crunch has now fully started to hit consumers and net wealth conditions are at a record low. As predicted last quarter, equity markets and property prices have continued to fall and, combined with high levels of consumer debt, this has caused the Financial Reality Index to fall to its lowest ever level.’