Buoyant growth returns across the world, lifting luxury industry

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A rise in import duties in luxury goods has lead to more Chinese consumers choosing to buy at home © Bloomberg

China and high-income economies are vital to the designer goods market

The global economy is enjoying an upswing. It is not yet clear whether it is more than cyclical. But an upswing it is. Moreover, it is not just an upswing in one part of the world economy. It is a synchronised global upswing. So what might this mean for the business of luxury?

In 2016, the global economy (measured at purchasing power parity) grew by 3.1 per cent. In its most recent World Economic Outlook, the International Monetary Fund forecast global economic growth at 3.5 per cent this year and 3.6 per cent in 2018.

IMF forecasts have hardly changed since last October (up by just 0.1 percentage point for this year and no change for 2018) or since the January update. But that is the point. The IMF thought the world economy would strengthen — and, so far as one can see, it has.

In the high-income economies, growth is forecast to hit 2 per cent this year and next, with the US economy growing a little faster (at 2.3 per cent in 2017 and 2.5 per cent in 2018) and the eurozone a little slower (at 1.7 per cent and 1.6 per cent, respectively).

All leading high-income economies are forecast to grow reasonably, with Spain in the lead (2.6 per cent this year) and Italy in the rear (just 0.8 per cent).

The improvement is also noteworthy in emerging and developing economies. After growth of 4.1 per cent last year, these are forecast to expand by 4.5 per cent this year and 4.8 per cent in 2018. Strikingly, all regions and important economies are now growing. Even Brazil’s battered economy is forecast to expand by 0.2 per cent this year, after contracting by 3.6 per cent in 2016, and Russia’s is forecast to grow by 1.4 per cent, after shrinking by 0.2 per cent last year.

Yet the leaders remain Asian emerging and developing countries, forecast to grow by 6.4 per cent this year and next. India is to be the world’s fastest growing large economy, with growth forecast at 7.2 per cent this year (up from 6.8 per cent in 2016) and 7.7 per cent in 2018. China is forecast to decelerate very slowly, to 6.6 per cent this year (down fractionally from 6.7 per cent in 2016) and 6.2 per cent next.

These improving prospects are subject to serious risks, most obviously geopolitical ones. The rise of populism may yet transform the world economy, particularly if the Trump administration ends up (as now seems less likely than a few months ago) with a significantly protectionist agenda. There are significant risks of military conflict between great powers. China’s growth is also dependent on rapidly rising debt, which is unlikely to prove sustainable in the long run.

Assume, however, that such dangers remain unrealised. Assume, therefore, that the expected upswing occurs. That should also be good for the luxury business. But some economies matter far more to these businesses than others.

Thus, according to estimates from consultancy Bain, residents of high-income economies accounted for just over half of the global market for luxury in 2016: 23 per cent were Americans, 19 per cent Europeans and 11 per cent Japanese. Meanwhile, the Chinese accounted for as much as 30 per cent and other Asian citizens were a further 10 per cent.

An important twist is that 75 per cent of purchases occurred inside high-income countries: 33 per cent in the Americas, 33 per cent in Europe, and 9 per cent in Japan. While the Chinese made almost a third of luxury purchases, only 7 per cent of luxury sales were inside China — but this balance might now change.

While buying luxury products is part of Chinese tourists’ experience, fears of terrorism have kept them from traditional centres such as Paris, and import duties on luxury goods have been raised. Consequently, more Chinese are buying at home: luxury conglomerate Richemont reported Asia-Pacific sales were up 10 per cent in the final quarter of 2016, citing “strong performances” in mainland China and Korea.

In all, the near-term prospects for the world economy seem to be good. So are those for the luxury business, with the recovery in the high-income economies, the dominant source of purchases. The two-year slowdown in the watch industry, for example, seems to be coming to a halt. Another transformative event, on the scale of the rise of the Chinese as purchasers, is not in the offing. Yet, barring a disaster, the overall market should remain reasonably buoyant.

By Courtesy Financial Times

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