The world sways; the luxury industry is making headway
It seemed like an uncontroversial statement: China’s recovery from the epidemic was an economic disappointment, I said. Neither domestic consumption nor exports rebounded nearly as strongly as expected. The two eminent economists I spoke to as part of a panel at this week’s FT Business of Luxury Summit in Monaco agreed. Weak real estate sector; excessive debt at the municipal level; cautious consumers. It is now a familiar story to Chinese viewers.
The summit audience had other ideas. When the Q&A started, the first interviewer flat out told us we were wrong about China. He was an investor in China’s luxury sector, and all of his companies, including real estate, reported all-time best results.
His comment reflects the mood of the conference participants. The luxury industry is booming worldwide. See the latest achievements of the biggest name in the industry, LVMH. Over the past year, as worries about an incipient recession have grown, the stock has left not only global indices but even index-leading tech giants like Apple in the dust. Revenue growth a in the first quarter? Seventeen percent. In Asia, excluding Japan, this rate was 36 percent. We are in a luxury boom. Share performance and increase of income in the ultra high-end luxury brand, Hermès was even better.
In many parts of the world, tight labor markets and generous pandemic incentives have helped wage growth for lower-income workers keep pace with, and in some industries exceed, inflation. The balance sheets of the middle class have also improved. Good.
But when the working stiffs prospered, the wealthiest consolidated their gains. Consider, for example, the USA. Between the end of 2019 and the end of 2022 is modest share it it increased from 1.9 percent owned by the bottom 50 percent of the national wealth to 3 percent. We welcome the news – and the top 1 percent didn’t fall off their noses, whose share rose from 30.4 to 31.1 percent, at the expense of those in the top half of the distribution.
You can hardly blame investors for betting on LVMH and other luxury houses. The income, wealth and purchasing power of the wealthiest create stable results throughout the cycle. (This is not to say that luxury companies are recession-proof. Years ago, I interviewed the CEO of a car manufacturer whose products started in the six figures. He said that his customers could always afford to buy his cars, but during the recession he found it vulgar .)
Envy is one of the most dangerous deadly sins. I much prefer greed, which I don’t think is a sin at all. It can be put to productive use. This makes me a capitalist and a firm believer in the markets. At the same time, I follow the philosopher John Rawls, who argued (very crudely) that a just society is designed to make the lot of the worst off the best possible, consistent with the freedom of all.
This means that we must tolerate massive inequality if it improves the lives of the least fortunate. Many of my fellow capitalists believe that this is exactly the world we live in: the restless desire of the many to join the ranks of the rich creates general prosperity.
There is truth in this, but within limits that have become clearer as the world has become more unequal. There is a growing consensus among economists that inequality within and between nations reduces economic growth. The economic mechanism behind this is very simple and is based on the premise that the rich are less likely than the poor to spend the next dollar and save instead. This boosts the value of financial assets, but in the absence of wider consumption, it barely finances productive investments. In an unequal society, consumption is weak and often has to be financed by debt. Atif Mian, Ludwig Straub and Amir Sufi call this “the savings abundance of the rich”.
If spending with affluent and flexible asset prices helps the post-Covid economic cycle to the hoped-for “soft landing”, we can all be happy about that. There is nothing wrong with the luxury business: it satisfies a need, produces beautiful things, and creates meaningful work. However, the extraordinary success exhibited in Monaco reflects the imbalance with which we all have to reckon.
Robert Armstrong is an American financial commentator for the FT
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