China’s spiral towards deflation shakes the luxury goods industry

Cristina D’Agostino

By Cristina D’Agostino24 août 2023

Swiss watch exports have been slowing for a month now. Is this surprising? Not really, if we are to believe the industry's suppliers, who have been noticing the phenomenon for several months already under cover of a typically Swiss discretion. This is because since the end of the speculative bubble that inflated the primary and secondary watch markets, following the fall in cryptocurrencies, geopolitical instability, inflation, the slowdown in the US retail market and the fall in the Chinese property market, the frenzy has finally died down. Boutiques and retailers of prestigious watches are reporting shorter waiting lists, and even some rare models are reappearing in shop windows—the result: a slowdown in orders placed by brands with their suppliers. Yesterday, Tuesday, 22 August, the Federal Customs Office announced a general downturn in Swiss exports, including precision machine tools.

Should we expect a pick-up in activity over the next few months? As far as China is concerned, nothing is less certain. On Monday, the Chinese property giant Country Garden announced that it was leaving the Hang Seng, the flagship index of the Hong Kong stock exchange, following a huge fall in its share price (it has lost 70% of its value since January). The spectre of the property giant going bankrupt would have serious repercussions for the Chinese economy - property will account for 30% of GDP by 2022 - while 90% of Chinese people own their own home. In this sector, the Chinese have historically preferred to invest their savings. As a result, the world's second-largest economy is struggling to revive demand and combat rising youth unemployment (20%). What's more, the country has just entered a period of deflation (the consumer price index fell by 0.3% in July) that analysts fear will last longer than 2021.
These different signals are complicating the business of luxury groups in the medium term, even if China has enabled them to record an average increase of 20% in the first half of the year. Indeed, the entire global economy could be affected.
In the United States, the situation has yet to be favourable for the retail sector, which is weighed down by a middle class that consumes little and is highly price-sensitive.
The region of the world with the best prospects remains the Middle East, where the luxury goods sector is currently valued at 15 billion euros, and is set to double to 30 billion by 2030, thanks in particular to the growing importance of Saudi Arabia.
All eyes will, therefore, be on the United States and its ability to bring inflation back down to 2%.

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