It seemed like an uncontroversial assertion: China’s recovery from the pandemic has been an economic disappointment, I said. Neither domestic consumption nor exports had rebounded nearly as strongly as expected. The two distinguished economists I was speaking to, as part of a panel at the FT’s Business of Luxury Summit in Monaco this week, agreed. A weak real estate sector; a debt overhang at local government level; cautious consumers. By now, a familiar story for China-watchers.
The summit’s audience had other ideas. When the Q&A began, the first questioner told us flatly that we were wrong about China. He was an investor in the Chinese luxury sector, and all his companies — including in real estate — were reporting best-ever results.
His comment echoes the mood of the conference attendees. The luxury industry is humming worldwide. Look at the latest results from the biggest name in the industry, LVMH. In the past year, as worries about an incipient recession have grown, the stock has left not only global indices, but even index-leading tech giants such as Apple in its dust. Revenue growth in the first quarter? Seventeen per cent. In Asia, excluding Japan, the figure was 36 per cent. We’re in a luxury boom. Share performance and revenue growth in the ultra high-end luxury brand Hermès have been even better.
In many parts of the world, tight labour markets and generous pandemic stimulus have helped wage growth for lower-income workers keep pace with inflation, and in some industries surpass it. The balance sheets of the middle class have improved as well. Good.
But if working stiffs have come out OK, 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 per cent grew from 1.9 per cent to 3 per cent. Welcome news — and no skin off the noses of the top 1 per cent, whose share rose from 30.4 to 31.1 per cent, at the expense of everyone else at the top half of the distribution.
You can hardly blame investors for placing their bets on LVMH and other luxury houses. The incomes, wealth and spending power of the richest create the prospect of stable results through the cycle. (This is not to say that luxury firms are recession-proof. Several years ago I interviewed the CEO of a car manufacturer whose products started in the six figures. He told me his customers could always afford to buy his cars, but in recessions they found it vulgar to do so.)
Envy is one of the most dangerous of the deadly sins. I much prefer avarice, which to my mind barely qualifies as a sin at all. It can be channelled into 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 roughly) that a just society is arranged to make the lot of the worst off as good as possible, consistent with the liberty of all.
This implies that we should tolerate immense inequality, if it improves life for the least lucky. Many of my fellow capitalists believe that we live in precisely this sort of world: it is the restless striving of the many to join the ranks of the rich that creates general prosperity.
There is truth in 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 among them, decreases economic growth. The economic mechanics of this are very straightforward, and based on the premise that the rich are less likely than the poor to spend the next dollar they acquire, and more likely to save it. This pumps up the value of financial assets, but in the absence of more broad-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 savings glut of the rich”.
If spending by the well-to-do and resilient asset prices help the post-Covid economic cycle come to the much hoped for “soft landing”, that is an outcome we can all be glad about. There is nothing wrong with the luxury business: it fills a need, produces beautiful things, creates meaningful work. But its extraordinary success, on full display in Monaco, reflects an imbalance that we all have to reckon with.
Robert Armstrong is the FT’s US financial commentator
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