The world economy is on the brink of a recession. According to statistics from the research firm Ned Davis, there is a 98 percent chance of a global recession occurring in the next year. (1) The firm has only before recorded such high probabilities twice before: in 2008, during the American financial crash, and in 2020, during the COVID-19 pandemic. Generally, a recession is understood as two consecutive quarters of negative GDP growth, but this definition can neglect other significant factors like employment and income levels. A more developed definition comes from the National Bureau of Economic Research, which states that a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” (2) Faced with grim economic prospects, consumers across the world anxiously await 2023.
In periods of economic downturn, discretionary spending, which often includes fashion and travel, is significantly reduced. The average person is often ambushed by the two-headed monster: inflation – which remains high at 9.1 percent – and recession. (3) And, as is happening now, revenge spending–when consumers spend saved money to make up for lost time during tough economic periods–is decreasing, as many parts of the world have (hopefully) passed the height of the pandemic. So, with a looming recession and decreased revenge spending, one would think the luxury market would flounder in 2023 as well.
However, one would be wrong.
The luxury market remains immune to the warning signs of a global recession. Currently, the market is valued at approximately 353 billion euros (377 billion dollars), a figure which is expected to grow at least 3 to 8 percent next year (4). While the International Monetary Fund is projecting that the worst is yet to come regarding economic downturn, conglomerates like Moët Hennessy Louis Vuitton SE (commonly known as LVMH) post strong sales that surpass analyst profit estimates. (5) Ninety-five percent of all luxury brands have in fact achieved “positive sales growth” in 2022, forecasting even greater success in 2023. (6)
Brands like Walmart, Best Buy, and Gap, on the other hand, are all bracing for dismal futures. Many of their consumers are simply not spending because of inflated prices and recession fears. The luxury market, however, does not project a gloomy future, for it is well insulated by its stable and wealthy consumer base. The Chief Financial Officer of LVMH, Jean Jacques Guiony, remarked upon the so-called disconnect between the global economy and the luxury industry. (7) “Luxury is not a proxy for the general economy,” he stated. “We end up selling to affluent people and they have a behavior of their own, which is not necessarily totally aligned with economics.” When Louis Vuitton, for example, raises prices, its average consumer will still be able to afford its products. In stark contrast, much of the world’s population actually feels the effects of inflation and recession and will reduce their consumption as a result.
Many wealthy buyers from Asia and the United States have taken advantage of the dollar trading for more than a euro for the first time in 20 years and have traveled to Europe to buy their luxury goods. (8) Chanel, whose classic flap bags sell for 9,000 euros – 8,850 dollars – has lines out the door on Paris’s Rue Cambon. Leather goods from heritage brands like Hermès and Louis Vuitton are considered investments that will hold value over time. And, this year alone, the average transaction for an American at a luxury goods store in Europe totals about 1300 dollars, significantly greater than the average of about 530 dollars in 2019. (9)
China, once holding a powerful stake in the luxury market, has suffered under Xi Jinping’s zero-Covid policy and its resulting shutdowns of public places like shopping centers. Luxury stores were inaccessible. Because of this, China’s share in the luxury market is estimated by Bloomberg Intelligence to have been halved in 2022. (10) But, as the zero-Covid policy begins to relax, Chinese consumers – potentially poised for revenge spending – will rely on luxury boutiques in second- or third-tier cities like Chengdu or Hainan for their luxury needs because of government restrictions on international travel. Ordinarily, these consumers would travel to London, Paris, Seoul, or Hong Kong to visit luxury boutiques, but they now mostly travel regionally instead of internationally to access luxury goods. Interestingly, the luxury market has not been adversely affected by the decreased spending of Chinese shoppers; this is likely because the American and European markets are booming. And, even though China’s share in the luxury market has dipped in zero-Covid times, it will rebound in the future. In fact, Chinese consumers are expected to comprise 40 percent of all luxury consumers by 2030. (11)
The luxury market has demonstrated its resiliency to recession in 2021 and 2022. While most of the world is currently preparing for a period of economic downturn, money keeps flowing to luxury brands from the very wealthy and ultra-wealthy – about 20 percent of their clientele. (12) This recent success of the market reflects larger class disparities within and between each country. Elite wealthy consumers partake in acts of revenge spending, but the harsh reality is that most of the global population does not have the resources – or luxury – to do so.
In short, as the world economy sinks around it, the luxury market is doing just fine.
Endnotes:
1: Kristopher Fraser. “Is luxury fashion proving itself recession proof?” Fashion United, August 23, 2022. Accessed December 14, 2022, https://fashionunited.uk/news/business/is-luxury-fashion-proving-itself-recession-proof/2022082364782.
2: Jamie Johnson. “Are We in a Recession: the Answer Isn’t That Simple.” Business Insider, October 26, 2022. Accessed December 15, 2022, https://www.businessinsider.com/personal-finance/are-we-in-a-recession.
3: Allison Morrow and Christopher Hickey. “5 signs the world is headed for a recession.” CNN, October 2, 2022. Accessed December 15, 2022, https://www.cnn.com/2022/10/02/business/global-recession-fears-explained/index.html.
4: Lauren Indvik. “Luxury market forecast to grow despite global recession fears.” Financial Times, November 15, 2022. Accessed December 14, 2022, https://www.ft.com/content/8b795dde-cc05-4d2b-b84c-35234e4b47ab.
5: Angelina Rascouet. “Luxury Goods Still Sell Big Even As Recession Fears Grow.” Bloomberg.com, October 20, 2022. Accessed December 15, 2022, https://www.bloomberg.com/news/articles/2022-10-20/luxury-goods-still-sell-big-even-as-recession-fears-grow.
6: Ron Emler. “Luxury sector will be ‘resilient to recession’ in 2023, say consultants.” The Drinks Business, November 22, 2022. Accessed December 15, 2022, https://www.thedrinksbusiness.com/2022/11/luxury-sector-will-be-resilient-to-recession-in-2023-say-consultants/.
7: Angelina Rascouet. “Luxury Goods Still Sell Big Even As Recession Fears Grow.” Bloomberg.com, October 20, 2022. Accessed December 15, 2022, https://www.bloomberg.com/news/articles/2022-10-20/luxury-goods-still-sell-big-even-as-recession-fears-grow.
8: Ibid.
9: Nick Kostov. “Americans Flock to Europe for Holiday Shopping Binge.” The Wall Street Journal, December 12, 2022. Accessed December 14, 2022, https://www.wsj.com/articles/americans-flock-to-europe-for-holiday-shopping-binge-11670797821.
10: Elizabeth Paton. “In China, Luxury Shopping Faces Ongoing Headwinds.” The New York Times, December 7, 2022. Accessed December 16, 2022, https://www.nytimes.com/2022/12/07/business/dealbook/covid-china-luxury-shopping.html.
11: Ibid.
12: Ian Krietzberg. “Ultra-rich still shopping for luxury despite inflation, recession fears.” CNBC, August 13, 2022. Accessed December 14, 2022, https://www.cnbc.com/2022/08/13/ultra-rich-still-shopping-for-luxury-despite-inflation-recession-fears.html.
