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It’s been a decade since the Great Recession first took hold and the global economy is stronger than ever. For the first time since a brief rebound in 2010, all of the world’s major economies — in America, Europe and Asia — are growing again in what has been called “synchronised global expansion.”
What’s more, worldwide financial assets — having more than tripled over the past three decades — now stand at more than 10 times global GDP. Superabundant capital means it’s relatively easy and cheap for any reasonably profitable, large enterprise to raise money to invest in new technologies, fund new product development, enter new markets, or even acquire new businesses in order to drive growth.
This week, stock markets on both sides of the Atlantic reached fresh all-time highs. The S&P 500, enjoying its best start to a year since 1987, closed at 2,751.29 on Tuesday. The benchmark Dow Jones industrial average closed 102.80 points higher to 25,385.80. And, on Wednesday the FTSE 100 closed up 0.2 per cent, or 17.49 points, to 7,748.51, another record high.
In Europe and North America, the economy continues to generate new jobs. In the US, which remains a pacer for the global economy, unemployment is at a 17-year low. In the Eurozone, unemployment hit a nine-year low in November.
Global Economic Prospects, a new report from the World Bank, projects the Chinese economy will continue to grow rapidly this year at 6.4 percent (down from 6.8 percent in 2017) while India’s economic growth will accelerate to a blistering 7.3 percent, up from 6.7 percent in 2017.
And yet, some worry that a picture-of-health economy indicates trouble not so far ahead. At this stage in the financial cycle, after sustained periods of growth with stock markets regularly reaching all time highs, economists begin to look out for signs of a market correction.
“When things are exuberant, it is also a time to be mindful about position,” says Austin Kimson, director and senior economist in the Macro Trends Group at Bain. “How do you position yourself for the next economic downturn?”
Indeed, for the fashion and luxury industry, whose goods are largely emotional purchases made with discretionary income when consumers are feeling confident, this is a key concern as we enter 2018. When stock markets crash, spending on personal luxury goods can be the first thing to go.
The single biggest risk to sustained economic growth is rising interest rates, which have remained artificially low since the global financial crisis. “It is wrong to say that interest rates will for sure remain low,” says Pascal Morand, executive president of the Fédération de la Haute Couture et de la Mode and a professor at ESCP Europe Business School. “On the contrary, the risk of their brutal increase is high.”
Indeed, interest rates have started to inch upwards in the United States, Canada and other economies, but are still very low on a historical basis. It seems inevitable that interest rates will rise this year, especially in the United States where tax cuts planned by the Trump administration are expected to spur spending, resulting in higher inflation that will necessitate interest rate increases.
This week, investors sold off US government bonds based on the belief that central banks were poised to move more aggressively than expected to end their crisis-era economic stimulus programmes of low interest rates and quantitative easing, which is when central banks buy their own government’s bonds to stimulate the economy by increasing the money supply. (When interest rates are already near zero, the only thing central banks can do is to buy bonds to increase the amount of money in circulation.)
However, some experts argue that the current situation is different from past economic highs precisely because of the money pumped into the global economy in the wake of the financial crisis — especially the quantitative easing taking place in the European Union — and that the stock market is nowhere near crashing.
“We are not in a bubble in the traditional sense,” says Dr Philippa Malmgren, an economic policy analyst and founder of the London-based DRPM Group. “We are in a bubble of our own making and it has much further to run.”
Indeed, some observers remain sanguine about the state of the global economy in 2018 and think there is a case for a strong continued growth trajectory ahead. What does this mean for the fashion and luxury business? “It means the number of people who can afford luxury goods will keep rising,” Malmgren says. Yet who’s doing the spending, where and on what may shift.
The US market still offers much potential for growth. In 2017, luxury goods consumption in the US was projected to rise just 2 percent compared with 6 percent in both Europe and Asia, according to an October 2017 report by Bain & Company. If the dollar continues to weaken, the US may see an uptick in tourism spend, which drives about one-third of luxury sales in the country.
Malgren also advises brands and retailers to focus on regions where China is investing, such as Mexico, as well as port cities like Rotterdam in the Netherlands, a part of China’s mega-scale “One Belt and One Road” infrastructure initiative, which aims to better link China with Europe and other Asian countries. (There are $900 billion worth of planned investments in ports and railways across Asia alone.)
What’s more, the rise of new life stages — such as “extended adolescence” and “pre-retirement” — is radically altering fashion and luxury consumption patterns. The accepted peak for luxury goods consumption has long been 35 to 50 years old, but in markets like the US, the Great Recession introduced turbulence to the traditional consumer trajectory. For the first time since 1880, more young Americans are living with their parents rather than living alone, with roommates or with a partner. Bain calls this “extended adolescence.”
At the same time, older consumers are holding off on retirement, either for financial or lifestyle reasons. While many retirement-age consumers were forced to remain in the workforce longer than anticipated in order to make up for savings lost during the recession, others are officially retiring and then dipping back into work simply because they wish to do so. As the average global life expectancy continues to increase, would-be retirees are spending on goods, services and experiences that they enjoy far past their early 60s.
Speaking of experiences, the last couple of years has seen much discussion on shifting luxury spending from goods to experiences. And yet some argue the penchant for physical products may not be dwindling as many have posited. Indeed, some analysts suggest that, as Millennials mature into adulthood, the fact that they value experiences over things will be proven fiction. In 2017, the global market for luxury experiences grew 4 percent, slightly less than the market for personal luxury goods, which grew 5 percent.
“People prefer experiences at different times in their lives: as empty nesters, and when they don’t have kids yet,” says Aaron Cheris, who leads Bain’s American retail practice. “Millennials take longer to get married and have kids. When they do, they behave almost identically to the generations that came before them. When it comes to overall consumer habits, one of the things that strikes us is that Millennials are no different.”
Food for thought as 2018 kicks off in earnest.
THE NEWS IN BRIEF
BUSINESS AND THE ECONOMY
Kering spins off Puma. The French conglomerate is set to distribute a majority of its stake in the German sportswear giant to its own shareholders as part of a long-held plan to focus purely on luxury. Kering will distribute 70 percent of total Puma shares — worth about €3.5 billion ($4.2 billion) at Thursday’s closing price — thereby reducing its stake to 16 percent from 86 percent.
Shandong Ruyi said to be leading bidder for Bally. The Chinese group, which is in advanced negotiations with the seller of the Swiss leather-goods maker, is said to be discussing a price of about $700 million. While Ruyi has pulled ahead of other suitors, such as Fosun and Septwolves, a final agreement on the terms has not been reached and another bidder may still emerge, according to sources.
Richemont Christmas sales rise at fastest pace in four years. The Geneva-based company reported revenue gains of 7 percent in the three months through December 2017. Analysts predicted 5.9 percent. Still, wholesale revenue declined as retailers struggled to reduce inventory.
Fast Retailing posts record first-quarter profit. The group's operating profit came in at 113.9 billion yen ($1.02 billion) in the quarter ended November 2017, versus 88.59 billion yen a year ago. Results were underpinned by its Uniqlo business, which saw its operating profit grow 54.7 percent abroad. Uniqlo earnings rose 18.6 percent at home.
Nordstrom ends rocky year with modest holiday sales growth. After a year of sluggish sales and a failed plan to take the company private, same-store sales climbed 1.2 percent in November and December combined. Though that marked a rebound from the 0.9 percent decline in the previous quarter, investors are still waiting for a more dramatic comeback.
Versace discredits "American Crime Story: The Assassination of Gianni Versace." The nine-part series, which examines the death of the famed Italian fashion designer, will premiere next week, on January 17. According to the company, who did not authorise and was not involved in the television series, much of the story has been sensationalised and "should only be considered a work of fiction."
H&M apologises for "monkey" hoodie ad. The Swedish clothing retailer has apologised for an image in which a black child modelled a hoodie with the text "coolest monkey in the jungle." The image caused an online storm and prompted the Canadian artist The Weeknd to end his collaboration with the brand.
Teen Vogue's editor-in-chief Elaine Welteroth steps down. The news of her departure comes shortly after the Condé Nast title ceased print publications in November 2017. Welteroth, who was officially appointed in April, has been credited with helping transform the title into a politically engaged, buzz-worthy publication. According to The Hollywood Reporter, Welteroth has signed with the entertainment agency CAA, sparking speculation she may be pursuing an on-camera career.
Glamour names editor-in-chief. The American title has appointed Samantha Barry, CNN's social media executive producer, to the role. The news follows an extensive search that lasted longer than anticipated. In September, editor-in-chief Cindi Leive announced she would step down from the role after leading the magazine for 16 years.
Stephan Gan joins Elle. After more than 15 years at Harper's Bazaar, the creative director is leaving to join Elle under the same title. In addition to his new role at Elle under recently named editor-in-chief Nina Garcia, Gan will continue as the editor-in-chief of V Magazine and VMan.
Amazon granted patent for smart mirror. The e-commerce giant has received a patent for a smart mirror that uses technology to virtually overlay clothes on to users. The system could show what items of clothing look like on a user, without being in a store to try them on.
First Amazon Alexa-enabled digital glasses to debut at CES. The augmented-reality glasses, developed by New York-based Vuzix, can talk to Amazon’s Alexa voice assistant and display information to the wearer’s field of view. Vuzix said it would release the smart glasses by the second quarter at a cost of about $1,000.
JD.com commits to sell €2 billion in French imports. China's largest retailer made the announcement during French president Emmanuel Macron’s state visit to China, which is likely to yield major contracts for blue-chip French companies.
Saint Laurent and Prada sell online in China. French fashion label Saint Laurent has started selling online in China through a JD.com's luxury portal Toplife, in a bid to tap the country's luxury consumers. Meanwhile, Italian luxury house Prada has launched a Chinese-dedicated website as part of its digital transformation, after experiencing declining profits and sales over the past few years.
WeChat launches new feature named "Brand Zone." The new feature on China’s most popular social media app lets brands display their official WeChat accounts, boutique stores and other customised content to users who don’t subscribe to their content. Instead, users can search directly for the brands they want to visit. Brands from Gucci to Louis Vuitton and Michael Kors have already utilised this new feature.
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