Download B U S I N E S S

MONDAY, OCTOBER 20, 2014
BUSINESS
Getting used to the ‘new mediocre’
GLOBAL ECONOMY WEEK AHEAD
LONDON: Evaporating inflation and slowing
growth have put financial markets into such a
spin that they could inflict further damage on
the world economy. Until a dramatic selloff,
exuberant markets had raced well ahead of the
economies that underpin them, partly because
the US Federal Reserve and other central banks
flooded the financial system with new money.
With the Fed set to turn off its money taps at
the end of this month, investors appear to have
woken up to poor growth prospects in much of
the world, something International Monetary
Fund chief Christine Lagarde has termed a “new
mediocre”. It’s not all doom and gloom. The
outlook for the world’s largest economy has not
suddenly taken a turn for the worse. And a 25
percent plunge in the price of oil since June
should put more money in the pockets of com-
panies and households.
“US momentum has softened a little but we
expect growth to remain solidly above trend. At
the same time, the drop in oil prices is as much
a reflection of supply as demand factors,” economists at Goldman Sachs said in a note. “For
consumers in the largest economies, it should
provide meaningful relief, offsetting the pressure from tighter financial conditions and
weaker global demand.”
Fears are centered on recession and
even deflation in the euro zone and the
extent of China’s slowdown. When the
world financial crisis raged from 20072009, China’s resilience was one of the
major silver linings. It may not be this
time.
Chinese third-quarter gross domestic
product numbers due tomorrow are forecast to show growth at its weakest pace in
more than five years, at 7.2 percent yearon-year. Beijing is expected to roll out a
stream of stimulus measures in coming
months, though most economists believe
it will hold off on an interest rate cut
unless conditions deteriorate sharply.
Pressure on Germany
A poor run of economic data suggests
Germany will flirt with recession in the
third quarter, having contracted by 0.2
percent in the second. Flash October purchasing managers indices for the United
States, euro zone, Germany and Francedue on Thursday-will give a first glimpse
of the state of their economies heading
into the last quarter of the year.
Britain won’t escape the impact of the
euro zone’s malaise but is in much healthier shape. Third-quarter GDP data on
Friday are forecast to show growth of 0.7
percent in July to September.
The International Monetary Fund,
United States, G20 and European Central
Bank have pressured Berlin to increase
public spending to lift its own economy
and help its peers in the currency area.
But the German government, the only
one in the euro zone with the resources to
spend more and the heft for it to make a
difference, is committed to a balanced
budget with no net new borrowing in
2015. The argument will doubtless be
reprised at an EU leaders summit in
Brussels late next week.
France and Italy are pressing for more
leeway on debt targets to buy time to push
through much-needed structural economic
reforms but are likely to have their 2015
budgets rejected by Brussels, leading to a
scramble to broker a face-saving deal.
The German and French economy ministers have asked experts in Berlin and Paris
to come up with reform recommendations
for their countries in an apparent attempt
to avert a full-blown clash over economic
policy. The hope is that a renewed French
and Italian commitment to economic
reforms will persuade Germany to loosen
its purse strings and the ECB to act more
forcefully, even crossing its Rubicon and
printing money.
The ECB has denied there is any “grand
bargain” in the offing and officials admit
that whatever transpires-the aim is that a
deal will be done in time for a December
summit-may fall short of what is required.
“We now see sovereign QE as unavoidable
next year,” said Ruben Segura-Cayuela,
economist at Bank of America Merrill
Lynch, referring to quantitative easing, or
asset purchases with new money. “In a central scenario of a weak economic recovery,
where the fiscal stance does not ease
meaningfully, and an inflation profile that
surprises the ECB on the downside, we
believe the central bank will be forced to
do more than it has done so far.”
The euro-zone’s most pressing problem
is Greece, where borrowing costs have
rocketed way above the level that would
allow Athens to quit the bailout program
hated by its people and return to financing
itself on the markets. Prime Minister
Antonis Samaras insists Athens will press
ahead with plans to wean itself off EU and
IMF aid. —Reuters
MINSK: Workers load beet roots into a railway carriage at the station of
Smorgon, some 125 kilometers northwest of Minsk yesterday. —AFP
HK protests, China slowdown
take sparkle off luxury market
PARIS: Protests in Hong Kong, an economic slowdown and anti-corruption drive in
China and a coup in Thailand: Asia is no
longer a market of constant growth for luxury goods firms. LVMH, world number-one
in the sector and owner of brands like
Louis Vuitton, Givenchy and Dior, saw its
sales drop by three percent in Asia, excluding Japan, in the third-quarter of 2014, a
far cry from the halcyon days of 2010-2012.
In every other market, LVMH’s sales
increased, according to figures published
last week. Even activity in sluggish Europe
has done better over the past nine months,
the group said. The crisis in Hong Kong
“will have an impact” on the quarterly
results, group finance director JeanJacques Guiony said. “We have already noted some negative impact on activity in
duty free shops in the third-quarter.”
Arnaud Cadart, an analyst at CM-CIC
securities, said there was a “rare comingtogether of economic, monetar y and
geopolitical factors that have had a negative impact on the Asian market”. Slowing
economic growth in China, along with a
clampdown on lavish spending by government officials, is crippling luxury goods
firms that are used to viewing the growing
pool of wealthy and brand-conscious consumers in the world’s number two economy as a cash cow.
Consultants Bain & Company have forecast that the luxury goods market in China
will contract for the first time ever this year.
This will have a clear impact on companies
like Switzerland’s Richemont, Britain’s
Burberry and Mulberry and Italy’s Prada,
and many luxury brands are reining in
their previously rapid expansion.
Bain said the slowdown in China, combined with other factors, would put the
brakes on the global luxury-goods sector,
which the consultancy now sees growing
at two percent in 2014 — what it called
“the new normal”. Cadart noted that the
Chinese market has carried the sector for
several years and “couldn’t keep up such a
pace in the long-term”.
While rich Chinese clients are still seen
as the big spenders, these days the big
spending tends to be on holiday rather
than at home.
Still, that’s not to say all luxury firms are
putting the skids on the breakneck pace of
expansion in China. Hermes cut the ribbon on a glittering new store in Shanghai
in September, and the shoe still also fits for
Jimmy Choo, whose initial public offering
(IPO) launched in London this week was
aimed at raising cash to tap into demand
in China and Japan.
Cognac, wine, watches
Luxury goods firms have also complained that a drive to stamp out lavish
and ostentatious spending has dried up
sales of cognac and expensive wines as
well as items such as watches, traditionally
given as presents. LVMH said revenues in
its wines and spirits division dipped 7 percent in the first nine months of 2014 from
a year earlier.
French spirit-maker Remy Cointreau this
week said sales in the first half of the year
had slumped 15.5 percent, dragged lower
by weaker demand for its flagship Remy
Martin cognac in China.
Luxury goods sectors in other countries
in the region have also taken a hit from
Chinese tourists staying away for a variety
of reasons, including a military-backed
coup in Thailand in May.
Singapore has seen luxury goods clients
cut by a fifth, according to Bain. But the
biggest dent in the sector is likely to come
from the ongoing protests in Hong Kong, a
global centre for luxury watches and the
high-end goods market in general.
Normally, the industr y can count on
around 10 to 12 percent of its turnover
coming from Hong Kong, and as much as
20 percent for watchmakers such as
Richemont and Swatch. In addition to
LVMH’s warning about the effect of the
protests on profits, watchmakers are
already feeling the pain.
Retail sales have declined by up to half
in the past few weeks, as protesters clog
up Hong Kong’s streets and clash with
police in the biggest democracy rallies
since the former British colony was handed
back to the Chinese in 1997.
The drop in sales in Asia is also having
an impact in companies’ home markets.
Tag Heuer watches, par t of the LVMH
group, has decided to make 46 people in
Switzerland redundant and Cartier will put
people on shorter working hours from
November. The only bright spot? Japan,
where the market in luxury goods is actually growing, even though Japanese clients
have lost some purchasing power due to a
weaker yen. —AFP