The Global Economy Outlook

The Global Economy Outlook

The global economy in early 2015 offers luxury purveyors both cause for celebration and concern. On the celebratory side, some key markets are showing signs of greater strength. The US economy is clearly performing better than in recent years, with employment growth up considerably and asset prices having strengthened substantially. In Europe and Japan, more aggressive monetary policies are boosting growth as well as asset prices. On the other hand, China’s economy continues to decelerate, even as the government takes steps to boost credit market activity. In two of the three other BRICs, Russia and Brazil, circumstances have conspired to create a weak economic environment. In addition, the uncertainty of currency volatility is making it difficult for companies to plan for the future. What follows is a look at the global economy and the potential impact on luxury goods companies.

Major markets

China: China’s economy has slowed down and continues to show considerable signs of weakness despite government efforts to reverse the slowdown. The Chinese economy grew 7.4 percent in 2014, the slowest rate since 1990. The government expects growth of only 7.0 percent in 2015. Lower growth could mean an inability to absorb workers migrating from rural to urban areas. The result would be high unemployment and social unrest. And, if the workers didn’t migrate, China wouldn’t grow since there would be zero productivity gains that come from switching workers from farms to factories. Thus, China can ill afford to grow much more slowly. Moreover, the government’s crackdown on corruption has caused a drop in the traditional giving of luxury gifts, thus exacerbating the slowdown in retail sales growth. In addition, China has lately seen considerable outflows of capital. Wealthy individuals have been moving money out of the country, often into high end property markets in such cities as Sydney, London, New York, and Los Angeles to name a few.

USA: The U.S. economy has accelerated and will likely grow faster in 2015 than at any time since 2005. While there are signs of strength, there have also been signs of weakness in early 2015. In part this may reflect bad weather in much of the country. But it may also reflect the impact of a weak overseas economy as well as the negative effect of a high valued dollar. The most important positive sign, however, is a very strong job market. The major weak component of the U.S. economy is housing. Data have bounced around in the past year due to higher mortgage interest rates, higher house prices. Plus, low inflation and lower energy prices are helping to boost consumer purchasing power. In addition, unlike in the recent past, there is no fiscal consolidation taking place. Due to a strong economy, the budget deficit has fallen dramatically, thereby nearly eliminating the political pressure to do something about the deficit.