The Implications Of China’s Economic Slowdown

    Slow economic growth combined with plunging consumer confidence are putting global luxury brands under more pressure in mainland China.
    Slow economic growth combined with plunging consumer confidence are putting global luxury brands under more pressure in mainland China. Photo: Burberry
    Adina-Laura AchimAuthor
      Published   in Macro

    What happened

    China’s economic growth plunged to 0.4 percent in Q2 2022, which represents the country’s weakest quarterly growth in more than two years. After expanding virus testing and imposing lockdowns and restrictions, the authorities have tried to address the economic fallout of the pandemic. However, with factory activity already in decline and consumer sentiment dropping significantly during the first quarters of the year, it has failed to avoid a plummet.

    This was not unexpected. Previously, Trading Economics data found that consumer confidence declined from 121.50 points in January to 86.80 points in May 2022. Retail sales also declined in May, down 6.7 percent from a year ago — a slight improvement compared to April 2022, when retail sales dropped by 11.1 percent.

    The Jing Take

    Until now, luxury labels have experienced vigorous growth on the back of China’s HENRYs and middle-class shoppers. But now, global brands should be prepared for a new consumer landscape. The pandemic, and its subsequent fallout, has changed consumer spending patterns in the mainland. Considering that the giant middle-class is a powerful engine of global luxury growth, heritage and premium labels must have contingency plans in place to deal with the economic fallout.

    To be sure, some brands are already more cautious about their future in China. In May, Johann Rupert, Chairman of Swiss firm Richemont observed: “Even when China comes out of isolation, the bounce back will not be as quick and as immediate as we have seen in Europe and the United States.” Last week, retailer Burberry saw quarterly sales down 35 percent in mainland China because of COVID complications. This downward trend contrasted to its performance in Europe, the Middle East, India, and Africa (EMEIA).

    Under this current scenario, brands can’t automatically depend on or expect to be saved by China’s HNWI and UHNWI individuals. A move toward inconspicuous consumption has created new symbols of power and affluence: Elite education, access to top healthcare, and retirement plans are top of mind. When it comes to luxury, consumers are splurging on cultural activities and investmenting in experiences over high ticket items. Let’s see how companies brace themselves.

    The Jing Take reports on a piece of the leading news and presents our editorial team’s analysis of the key implications for the luxury industry. In the recurring column, we analyze everything from product drops and mergers to heated debate sprouting on Chinese social media.

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