China’s growth problems will not be cured by retail therapy
Slowing emerging market economies pose serious problems for luxury brands
The performance of the luxury industry depends on the vigour of the global economy and the success of people who want to buy upmarket products. Aspirational consumers of luxury goods have done relatively well almost everywhere. But the growth of the world economy is disappointing. The performance of the global luxury sector — worth €250bn a year, according to a Bain study — will depend on how the balance between these two elements works out.
Yet again, the International Monetary Fund has downgraded its economic forecasts in its latest world economic outlook, released last month. The baseline projection for this year is for 3.2 per cent growth of the world economy, measured at purchasing power parity. This is much the same as last year, 0.2 percentage points lower than was forecast as recently as January and 0.4 percentage points lower than was forecast last October.
This level is surely no disaster, but the consistent downgrading of growth rates is a worry.
At least as important, the world economy is confronting a swath of political and economic risks. Most will come to nothing. But the cumulative danger of something going badly wrong looks high.
For high-income countries, the forecast growth this year is a modest 1.9 per cent, as it was in 2015. Christine Lagarde, managing director of the IMF, has rightly described this as a “new mediocre”.
But the attractive feature of the forecast is the expectation of at least some growth in all significant high-income economies: 2.4 per cent in the US, 1.9 per cent in the UK, 1.5 per cent in the eurozone, and a modest, but still positive, 0.5 per cent in Japan.
The performance and prospects of emerging economies are also mediocre, at least by their relatively dynamic past standards. In 2015, these economies grew 4 per cent. This year, their growth is forecast to reach 4.1 per cent, with a rise to 4.6 per cent for 2017. China and India are forecast to grow by 6.5 per cent and 7.5 per cent, respectively, in 2016. But falling prices have hit commodity exporters hard, with prolonged and deep recessions under way in Brazil and Russia.
The emerging economies survived the financial crisis of 2007-09 relatively unscathed, the leading exceptions being in central and eastern Europe. Emerging economies’ past dynamism, especially China’s, had a dramatic effect on the global market for luxury products. According to Bain, China’s demand grew from a mere 1 per cent of the luxury market in 2000 to more than 30 per cent in 2015. Meanwhile, the shares of Japan, America and Europe all dropped. Moreover, the Chinese buy 80 per cent of their luxury goods abroad, so their demand has had a huge effect on the global industry.
Now, however, the Chinese economy has slowed towards what President Xi Jinping has labelled “the new normal”. This is an important negative factor for the luxury industry. But China’s slowdown is affecting other economies. One effect is the end of the boom in commodity prices.
Key for many emerging economies has been a slowdown in net capital flows. This, argues the IMF, is largely due to “the narrowing differential in growth prospects between emerging market and advanced economies”. Yet even more important has been the failure to maintain the pace of structural reforms in too many emerging countries.
The new mediocrity may be disappointing — but it means sustained growth. Unfortunately, one can also see significant downside risks. Some reflect economics, such as divergent monetary policies; the impact of negative interest rates on confidence; low commodity prices; instability in capital flows; and the possibility of renewed turbulence in financial markets.
Others are political. These include instability in the Middle East; mass migration; populism in high-income countries; the possibility of Britain leaving the EU; and friction among great powers.
The growth in prosperity of the world’s aspiring and achieving classes is good for the business of luxury. But populism is growing too, as the many who are outside the charmed circle of the relatively successful become disillusioned, even despairing. How will this end? The answer is likely to play a big part in the global economic story over the next decade.