It seemed like an unchallenged claim: China’s recovery from the pandemic has been an economic disappointment, I said. Neither domestic consumption nor exports recovered nearly as much as expected. The two respected economists I spoke to on a panel discussion at the FT’s Business of Luxury Summit in Monaco this week agreed. A weak real estate sector; a municipal debt overhang; cautious consumers. A well-known story for observers of China.
The audience at the summit 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 China’s luxury sector, and all of his companies — including real estate — reported their best-ever results.
His comment reflects the mood of the conference participants. The luxury industry is booming worldwide. Check out the latest results from the biggest name in the industry, LVMH. Over the past year, as fears of an incipient recession mounted, the stock has not only let down global indices, but even leading tech giants like Apple. Revenue growth in the first quarter? Seventeen percent. In Asia, excluding Japan, it was 36 percent. We are in a luxury boom. Even better were the price performance and sales growth of ultra-high-end luxury brand Hermès.
Envy is one of the most dangerous deadly sins. I prefer a lot more stinginess that can be channeled into productive use
In many parts of the world, tight labor markets and generous pandemic stimulus measures have helped wage growth for lower-income workers keep pace with, and even exceed, inflation in some industries. The balance sheets of the middle class have also improved. Good.
But when working people have gotten off easy, the richest have consolidated their gains. Take the United States, for example. Between late 2019 and late 2022, the bottom 50 percent’s modest share of national wealth grew from 1.9 percent to 3 percent. Welcome news — and no skin off the nose 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.
It’s hard to blame investors for betting on LVMH and other luxury houses. The incomes, wealth and purchasing power of the richest create the prospect of stable outcomes throughout the cycle. (That’s not to say luxury companies are recession-proof. A few years ago, I interviewed the CEO of an automaker whose products were in the six figures. He told me his customers could always afford to buy his cars, but during recessions they would they do it found it vulgar to do so.)
Envy is one of the most dangerous deadly sins. I much prefer stinginess, which I don’t think counts as a sin. It can be directed to productive use. That makes me a capitalist and a firm believer in the markets. At the same time, however, I follow the philosopher John Rawls, who argued (very crudely) that a just society is designed to improve the lot of the worst as much as possible, consistent with the liberty of all.
This means that we should tolerate immense inequality if it improves the lives of the least fortunate. Many of my fellow capitalists believe that we live in just such a world: it is the restless quest of the many to join the ranks of the rich that creates general prosperity.
There is truth in that, 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, reduces economic growth. The economic mechanisms for this are very simple and are based on the assumption that the rich are less likely than the poor to spend the next dollar they earn and are more likely to save it. While this increases the value of financial assets, it does little to fund productive investment in the absence of broader consumption. In an unequal society, consumption is weak and often has to be financed through debt. Atif Mian, Ludwig Straub and Amir Sufi call this “the savings glut of the rich”.
If spending by the affluent and resilient asset prices help the post-Covid economic cycle achieve the hoped-for soft landing, that’s an outcome for all of us to celebrate. There is nothing wrong with the luxury business: it fulfills a need, produces beautiful things and creates meaningful work. But his extraordinary success, on display in Monaco, reflects an imbalance we all have to reckon with.
Robert Armstrong is the FT’s US financial commentator
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