The two faces of recession

According to Chief economists outlook, a survey of chief economists at major financial institutions and corporations around the world, recession will not stop luxury but it will slow down fashion. 2023 will in fact bring a global recession, as economy will continue to be scarred by geopolitical tensions and the Fed-Federal reserve system and the Ecb-European central bank will carry on their monetary tightening.

By definition, recession occurs when there is no economic growth for six months or more. However, economists have been considering for some time other variables, such as inflation, employment rates, lower incomes, and declining corporate profits. These are all factors that are occurring at the moment. How will this macroeconomic situation affect the fashion system? The State of fashion 2023 report by McKinsey & Company unveils a twofold scenario. Along with the war in Ukraine, rising inflation and supply chain pressures will lead to a global fashion industry slowdown, creating therefore many difficult challenges ahead: 85% of industry executives expect inflation to still be a challenge this year, and 58% believe the energy crisis will further weaken the market. However, things change if looking specifically at high-end. In fact, luxury sales are expected to grow globally between +5% and +10% in 2023, compared to a range of -2% to +3% for the rest of the industry.

«Our report highlights new areas of growth for the sector: while China may slow down, in part due to restrictions still in place to contain the pandemic, Japan and South Korea continue to fuel growth in the Asia-Pacific region,» Gemma D’Auria, senior partner at McKinsey, commented. She then added that in the Middle East it is especially the luxury market in the Gulf cooperation council countries that could grow to 11 billion dollars during this fiscal year, with 60% of purchases made within national borders. Furthermore, she specified retail sales in the Us could hit record-breaking levels never seen before in the past 20 years.

«Just when the fashion industry was about to recover from the pandemic, with global revenues growing +21% in 2021, deteriorating macroeconomic and geopolitical conditions had major repercussions in the second half of 2022,» Emanuele Pedrotti, partner at McKinsey, added. «We expect 2023 to be another challenging year for fashion. Global sales growth will be driven by the luxury segment, and some important trends that should guide companies’ strategies will consolidate,» he clarified. It will therefore be, for all intents and purposes, a two-speed year.

«During a recession, everyone feels poorer and therefore has less desire to spend or less ability to spend. This is what normally happens,» Luca Solca, senior research analyst global luxury goods at Bernstein, explained to MFF. Today, however, consumers with good spending power have a desire to get back on track. “This may be a reason to proceed to make a more constructive spending forecast. The fact that the labor market is holding up helps a lot,» he concluded. (All rights reserved)