SHANGHAI, China — After riding record highs in recent years, China's consumer confidence growth flattened in the first half of 2018, a sign that concerns some watching the luxury sector. And there are other reasons to be wary of more bullish forecasts for Chinese luxury growth, according to Exane BNP Paribas' head of luxury goods Luca Solca.

“The two pillars supporting Chinese consumer feel-good — real estate price inflation and salary inflation — are looking softer. Real-estate prices seem to be in reverse, among signs of broader financial deleverage; these prices are typically a six-to-12 month leading indicator of luxury spending,” Solca says.

In China, the correlation between luxury sales growth and consumer confidence growth is one of the main demand drivers that has recently plateaued. Data from China’s National Bureau of Statistics shows China’s consumer confidence index rising precipitously throughout 2017, topping out at 124 points in October. In February 2018, the index once again reached 124, although April and May, the two most recent data points available, show a slight dip to 122.9 points.

Solca’s more conservative outlook for China’s luxury segment runs counter to the prevailing narrative of blockbuster growth driven by big-spending millennial consumers and China’s 300-million-strong and growing middle class.

The "China Luxury Report" from Bain and Co., released in January, showed strong 20 percent growth in China's luxury sector in 2017 and predicted sales of luxury goods on the Mainland will grow by 20 to 22 percent this year. If it comes to pass, such expansion would drive up growth across the global luxury market by as much as 8 percent.

But according to Exane BNP Paribas’ research, broader economic trends show signs that consumer confidence could further dampen and therefore hit luxury spending. In the first quarter of 2018, China’s PMI index (which measures manufacturing output) took a hit, the Chinese yuan’s appreciation against the US dollar is troubling for exports and the possibility of a trade war looms large too.

“Trade friction between the USA and China may puncture Chinese consumer confidence and further deteriorate Chinese macro,” Solca warns.

Solca’s current market assessment presents a mixed picture for the sector. Timepieces are being supported by a weaker Hong Kong dollar, but jewellery sales on the mainland have soured (although the decision to cut import duties should help). Soft luxury appears to be softening on the mainland but is growing strongly in Hong Kong, largely on the back of favourable foreign exchange rates.

No one doubts China’s role in the driving seat of the global luxury sector will continue, but clearly the winds are changing. Luxury brands should take note.

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