The world is reeling; the luxury industry advances
It seemed like an indisputable statement: China’s recovery from the pandemic has been an economic disappointment, I said. Neither domestic consumption nor exports had recovered as strongly as expected. The two distinguished economists I spoke to, as part of a panel at the FT Luxury Business Summit in Monaco this week, agreed. A weak real estate sector; an over-indebtedness at the local government level; cautious consumers. By now, a familiar story to China watchers.
The summit audience had other ideas. When the Q&A began, the first questioner flatly told us that we were wrong about China. He was an investor in the Chinese luxury sector, and all of his ventures, including real estate, were reporting the best results in his history.
His comment echoes the mood of the conference attendees. The luxury industry is buzzing around the world. Check out the latest results from the biggest name in the industry, LVMH. In the past year, as concerns about a looming recession have grown, the stock has left not only global indices, but even index-leading tech giants such as Apple, in the dust. Revenue growth in the first quarter? Seventeen percent. In Asia excluding Japan, the figure was 36 percent. We are in a luxury boom. Stock performance and revenue growth at high-end luxury brand Hermès have been even better.
In many parts of the world, tight labor markets and generous pandemic stimulus have helped wage growth for low-income workers keep pace with and, in some industries, outpace inflation. The balance sheets of the middle class have also improved. Good.
But if the working stiffs have done well, the richest have consolidated their gains. Consider the US, for example. Between the end of 2019 and the end of 2022, the modest share of national wealth held by the bottom 50 percent grew from 1.9 percent to 3 percent. Good news, and without breaking the skin of the top 1 percent, whose share rose from 30.4 to 31.1 percent, at the expense of everyone else in the top half of the distribution.
Investors can hardly be blamed for betting on LVMH and other luxury houses. The income, wealth and purchasing power of the richest create the prospect of stable results throughout the cycle. (This is not to say that luxury companies are recession-proof. Several years ago I interviewed the CEO of an automaker whose products started in the six figures. He told me that his customers could always afford his cars, but in recessions seemed vulgar to me to do.)
Envy is one of the most dangerous deadly sins. I much prefer greed, which in my opinion hardly qualifies as a sin. It can be channeled into productive use. This makes me a capitalist and a firm believer in markets. At the same time, however, I follow the philosopher John Rawls, who argued (very crudely) that a just society is organized to make the lot of the worst as good as possible, consistent with the liberty of all.
This implies that we should tolerate vast inequality, if it improves the lives of those less fortunate. Many of my fellow capitalists believe that we live in precisely this kind of world: it is the tireless effort of many to join the ranks of the rich that creates general prosperity.
There is some truth to this, but within limits that have become clearer as the world has become more unequal. There is a growing consensus among economists that inequality, both within and between nations, slows economic growth. The economic mechanics of this are very simple and are based on the premise that the rich are less likely to spend the next dollar they acquire than the poor, and are more likely to save it. This increases the value of financial assets, but in the absence of more broadly based consumption it 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 excess savings of the rich”.
If spending from well-to-do and resilient asset prices helps the post-COVID-19 business cycle reach the long-awaited “soft landing,” that’s an outcome we can all be happy about. There is nothing wrong with the luxury business: it fills a need, it produces beautiful things, it creates meaningful work. But its extraordinary success, on full display in Monaco, reflects an imbalance that we all need to reckon with.
Robert Armstrong is the American financial commentator for the FT
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