The world is rocking; the luxury industry is on the rise
It seemed like an undeniable statement: China’s post-pandemic recovery was economic. disappointment, I said. Neither domestic consumption nor exports recovered as strongly as expected. Two eminent economists I spoke with in a discussion at the FT Business of Luxury Summit in Monaco this week agreed. Weak real estate sector; debt burden at the level of local authorities; careful consumers. By now, a familiar story for China watchers.
The summit audience had other ideas. When the Q&A began, the first questioner told us bluntly that we were wrong about China. He was an investor in China’s luxury goods sector, and all of his companies, including those in real estate, reported better results.
His comment echoes the mood of the conference participants. The luxury industry is booming around the world. Take a look at the latest results from the industry’s largest name, LVMH. Last year, as fears of an impending recession intensified, stocks left not only global indices, but even top tech giants like Apple, in the dust. Revenue growth in First quarter? Seventeen percent. In Asia, excluding Japan, the figure was 36 percent. We have a luxury boom. Share productivity and Revenue Growth at the ultra-high-end luxury brand Hermès were even better.
In many parts of the world, tight labor markets and generous pandemic stimulus have helped wage increases for low-income workers keep pace with, and in some industries, even outpace inflation. The balance sheets of the middle class have also improved. Good.
But if the workers are all right, then the richest have secured their incomes. Let’s take the USA for example. Between the end of 2019 and the end of 2022, modest share of national wealth owned by the poorest 50 percent rose from 1.9 percent to 3 percent. Good news – and no skin on the nose of the top 1 percent, whose share rose from 30.4 percent to 31.1 percent, at the expense of everyone else in the top half of the distribution.
You can hardly blame investors for betting on LVMH and other luxury homes. The income, wealth, and purchasing power of the richest create the prospect of stable outcomes in the cycle. (This doesn’t mean that luxury goods firms are recession-proof. A few years ago, I interviewed the CEO of an automaker whose products started in six figures. He told me that his customers could always afford to buy his cars, but during the recession, they considered it vulgar.)
Envy is one of the most dangerous mortal sins. I prefer greed, which, in my opinion, can hardly be called a sin. It can be directed to productive use. This makes me a capitalist and a firm believer in markets. At the same time, though, I follow the philosopher John Rawls, who argued (very crudely) that a just society is designed to make the lot of the worst as good as possible, in line with the freedom of all.
This means that we must put up with huge inequalities if it improves the lives of the least fortunate. Many of my fellow capitalists believe that this is the world we live in: it is the restless desire of many to join the ranks of the rich that creates universal prosperity.
There is truth in this, but within limits that become clearer as the world becomes more unequal. There is a growing consensus among economists that inequality both within and between countries reduces economic growth. The economic mechanics of this is very simple and is based on the premise that the rich are less likely than the poor to spend the next dollar they purchase and more likely to save it. This increases the value of financial assets but, in the absence of wider consumption, does little to finance productive investment. In an unequal society, consumption is weak and often has to be financed with debt. Atif Mian, Ludwig Straub and Amir Sufi call it “the savings surplus of the rich.”
If spending through wealthy and resilient asset prices helps the post-coronavirus economic cycle achieve a welcome soft landing, that’s an outcome we can all be happy about. There is nothing wrong with the luxury goods business: it satisfies a need, produces beautiful things, creates meaningful work. But his extraordinary success, fully demonstrated in Monaco, reflects an imbalance that we all have to reckon with.
Robert Armstrong is the FT’s US financial reporter.
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