The world reels; the luxury industry advances

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It seemed like an incontrovertible statement: China’s recovery from the pandemic has been cheap disappointment, I said. Neither domestic consumption nor exports rebounded as strongly as expected. The two prominent economists I was speaking to, as part of a panel at the FT’s Business of Luxury Summit in Munich this week, agreed. A weak real estate sector; a debt overhang at the local government level; prudent consumers. By now, a familiar story for observers of China.

The summit audience had other ideas. When the Q&A began, the first caller flatly told us we were wrong about China. He was an investor in the Chinese luxury sector and all of his companies, including the real estate ones, were recording their best results ever.

His commentary echoes the mood of the conference attendees. The luxury industry is buzzing around the world. See the latest results from the biggest name in the industry, LVMH. Over the past year, as concerns about an incipient recession mount, the stock has left not only global indexes in the dust, but also leading index tech giants like Apple. Revenue growth in first quarter? Seventeen percent. In Asia excluding Japan, the figure was 36%. We are in the luxury boom. Share performance and revenue growth in the ultra high-end luxury brand Hermès have been even better.

Envy is one of the most dangerous deadly sins. I much prefer avarice, which can be channeled into productive use

In many parts of the world, tight labor markets and generous pandemic stimulus have helped wage growth for low-income earners keep pace with and in some sectors outpace inflation. Middle-class budgets have also improved. Well.

But if the hard workers came out OK, the richest ones consolidated their earnings. Let’s consider the United States, for example. Between late 2019 and late 2022, the modest share of national wealth held by the bottom 50% has grown from 1.9% to 3%. Good news – and no skin off the nose of the top 1 per cent, whose share rose from 30.4 to 31.1 per cent, 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 incomes, wealth and spending power of the wealthiest create the prospect of stable results over the cycle. (That’s not to say that luxury companies are recession-proof. Several years ago I interviewed the CEO of an automaker whose products started with six digits. He told me his customers could always afford to buy the cars, but found it vulgar to do so during recessions.)

Envy is one of the most dangerous deadly sins. I much prefer avarice, which in my view barely 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 loosely) that a just society is organized to make the most of the fate of those who are worse off, consistently with everyone’s freedom.

This implies that we should tolerate immense inequality, if it improves the lives of the less fortunate. Many of my fellow capitalists believe that we live in just this kind of world: it is the restless effort of the many to join the ranks of the wealthy 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 nations and between them, decreases economic growth. The economic mechanics of this are very simple and are based on the premise that the rich are less likely than the poor to spend the next dollar they acquire and are more likely to save it. This increases the value of financial assets, but in the absence of broader-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 this “the excess savings of the rich”.

If the spending of affluent and resilient asset prices will help the post-Covid business cycle achieve the much hoped-for “soft landing,” that is an outcome we can all be happy with. There’s nothing wrong with the luxury business: it satisfies a need, produces beautiful things, creates meaningful work. But his extraordinary success, on full display in Monaco, reflects an imbalance we all have to deal with.

Robert Armstrong is the US financial commentator on the FT

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