RIO DE JANEIRO, Brazil — At first glance, the Portuguese-pavement boardwalk on Rio de Janeiro's Ipanema Beach appears as affluent, vibrant and joyful as it was during the country's boom years. Surfers drag their boards along the sand, cyclists weave around joggers and sunbathers in lounge chairs sip from cracked coconuts. On the surface, the city seems the ideal destination for the upcoming 2016 Summer Olympic Games.

But one need only strike up a conversation with a few locals or scan the news to realise that Rio is nowhere near ready to receive the hundreds of thousands of visitors who are projected to flood the city for the Olympics, or that Brazil’s economy is in deep disarray. What started as a significant downturn — driven by slowing growth in China, Brazil’s largest trading partner — has turned into the most damaging recession in 30 years.

In 2015, the country’s consumer price index rose 10.67 percent, the highest rate of inflation in 13 years, according to the Brazilian Institute of Geography and Statistics (IBGE). The same year, the country’s GDP shrunk 3.8 percent to R$5.9 trillion ($1.6 trillion at current exchange), the largest decline since 1990. In March 2016, Brazil’s National Confederation of Shopkeepers reported that the number of delinquent companies — defined as businesses that have defaulted on their debts — had increased by 11.08 percent on the previous year.

Make no mistake: the current state of affairs in Brazil is having a serious effect on the country's appetite for luxury goods.

And it’s not just the economy that’s in disarray. The weak financial picture has also helped to drive impeachment proceedings against president Dilma Rousseff, who was replaced by her vice president, Michel Temer, after being suspended on May 12. While Rousseff is accused of cooking the federal budget’s books in order to hide the growing deficit, Temer himself was recently convicted in court of violating campaign finance laws. What’s more, their party and its allies have been embroiled in a vast bribery scandal centred on state-run oil company Petrobras. Of course, corruption here is nothing new. But it’s more difficult to ignore when the unemployment rate jumps nearly 2 percentage points in one year, clocking in at 8.5 percent in 2015 up from 6.8 percent in 2014.

And while Louis Vuitton's Cruise 2017 runway extravaganza last weekend seemed to suggest otherwise, make no mistake: the current state of affairs in Brazil is having a serious effect on the country's appetite for luxury goods. "Nobody knows what's going to happen here politically — that's the truth. It's a very strange situation for any level," says Brazilian fashion industry consultant Gloria Kalil. "Brazil gives false messages; the beauty, the openness. But I don't know who continues to buy here right now. Sometimes you go to those big luxury shops and you see no one in there for days and days and days. It's very hard to nail down the problem; you never get very straight answers when you ask. They say that they send their collections to clients' homes. Maybe they're right, maybe they know what they're doing. I'm not sure."

Still, it's not difficult to understand why Vuitton chose to show in Brazil, or why Hermès — which is sponsoring the country's showjumping team during the Olympics — is opening a second store there, its first in Rio, this summer. It is an important market for luxury goods because it remains home to a large number of wealthy people. The country accounts for more than 50 percent of the total holdings of South America's high net worth individuals — $3.97 trillion — down just 1.4 percent from 2015, according to a 2015 report from Capgemini. "Brazil is not a mature market," adds Carlos Jereissati Filho, chief executive of Iguatemi Empresa de Shopping Centers SA. "There is still a lot of opportunity for growth."

High tariffs, which make luxury goods significantly more expensive here — sometimes by 50 or 60 percent — have long been a roadblock to sales. However, many luxury brands have begun adjusting their prices in Brazil to bring them more in line with global norms. What’s more, Brazilian consumers, who traditionally did much of their luxury shopping abroad, are perhaps spending more at home. Brazilians spent $17.4 billion overseas in 2015, down 32.1 percent from the year before and the lowest figure since 2010, according to a report from Brazil’s Central Bank. According to Filho, “Because they travel less, they tend to shop more in the country.”

To be sure, there are plenty of top Brazilian clients that prefer buying close to home not only because they can afford to, but also because they would rather engage with salespeople who speak their language and understand local customs. According to insiders, this applies especially to those who live on the countryside and haven't spent much time abroad. A shop in Paris or Milan can feel intimidating.

“A good thing is that most of rich people that live in the countryside of Brazil are farmers and important agribusiness investors, one of the few industries that is not in crisis in Brazil,” says Maria Rita Alonso, editor in chief of L'Officiel Brasil. “For them, consumption is still rising. It’s a situation very different to the one lived by the industrial elite, like the construction and real estate sectors, which are suffering most with the crisis.”

Local retail also allows Brazil's luxury consumers to take advantage of the country's culture of paying in installments. Most of the population, regardless of income, pays for everything, from groceries to shoes, in installments, known as parcelas. Western brands that allow parcelas have fared better than others, but they must also reckon with the downside associated with such plans. "The issue with the luxury buyer in the Brazil is that a lot of them tend to buy on credit," explains Gustavo Gomez, director of research and methodology at consumer behavior research and consulting firm Envirosell. "A lot of these brands are not interest free, so with interest rates rising, the price of the goods are increasing and consumers are being a lot more cautious."

And while Brazil remains a country predominantly made of spenders, not savers, today cash is often being diverted to expenditures other than handbags. “There is an increase in rental prices because a lot of people are not buying homes, which is taking disposable income that an upper middle class family might have and putting it towards their living expenses instead of a luxury or a consumption item,” Gomez adds.

Some international fashion labels, though, have had difficulty gaining traction in Brazil because of a cultural disconnect that has nothing to do with finances. For instance, "Kate Spade New York and other very American brands don't really connect with the Brazilian market," Filho says. "Italian and French brands are more desired. It takes time to really meet the market." But it's not just aspirational luxury players that have struggled, argues Kalil. "People don't buy names that aren't well known," she says. "Big companies like Chanel, Prada and Hermès can support years of [a weak economy]. But names that don't carry big stars won't be able to endure those years that it will take us to recover."

Indeed, it seems that the biggest challenge for luxury brands is not the country’s sentiment or traditional shopping patterns, but a simple change in circumstances for the new elite. “There is a lot of inequality in Brazil’s economy; there are super rich people, but there is also poverty,” Gomez says. “In the last two decades or so, Brazil really made a good effort to decrease that inequality, which meant there were a lot of families moving into middle class and a lot of middle class families moving into upper middle class.”

Indeed, more than 50 million Brazilians joined the "lower-middle” (defined as a monthly income of R$1,646 to R$6,585), “middle” (R$6,585 to R$9,954) and "upper-middle or rich" (R$9,954 or higher) classes between 2004 and 2014. By the end of that year, Brazil’s middle class had reached 130 million, up 63 percent from a decade earlier.

“That’s what created this market for luxury,” he says. But that number began to shrink in 2015, according to a report by Brazilian banker Bradesco. Between January and November of last year, 2.6 million people left the middle and upper-middle classes, while 3.7 million left the lower middle class. The “extremely poor” and “poor” classes, however, grew by 6.5 million. “Now that the economy is uncertain, interest rates are increasing, unemployment is increasing, the prediction is that inequality is going to increase. The potential consumer who had the aspiration to buy something luxurious can’t do that any longer.”

So while the luxury world’s hopes for Brazil remain high, it’s unlikely that there will be a flurry of new store openings any time soon, especially if the real numbers are any indication. In 2015, the retail sales volume was down 4.3 percent, according to the IBGE. “Sales in the luxury market in Brazil [have been] affected like all other retail sectors,” Alonso says. “There's no doubt.”

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