When we think about brands such as Dior, a sense of grandeur and excess is evoked. However, with Covid-19 causing a recession in August 2020 and due to spark a double-dip recession in 2021 ( The Guardian, Jan 2021), consumers are no longer spending on luxury goods.
The US has imposed tariffs on $250bn (£199bn) worth of Chinese goods, while China has
placed import levies on $110bn of US goods. China exports more goods to the US than the
US exports to China, so Chinese companies have been making losses in profit as a result.
Since companies are making losses, consumers are making less disposable income.
Indeed, China’s annual rate of expansion had slowed from 6.4% to 6.2% in the second
quarter of 2019. Therefore, due to the trade war, there are fewer Chinese consumers able to
buy luxury consumer goods. This is a big deal as 32% of the luxury consumer market is from
China.
Furthermore, the possibility of another recession in the near future would shrink the demand
for luxury brands even more. On August 14, the Dow Jones Industrial Average plummeted
800 points—its worst day all year—after the federal bonds market experienced what
economists call an "inverted yield curve." Inverted yield curves have preceded all nine
recessions in the American economy since 1955, and only once, back in the mid-1960s, did
a recession not begin within 24 months of a dreaded inversion. On August 21, the yield
curve inverted again. With regards to Europe, the prospect of a no-deal Brexit could cause
large consumer economies—Germany and the UK—to face a severe recession too. , the
prospect of a no-deal Brexit could cause the U.K.'s GDP to decline by 3.5 percent; by
another estimate, the U.K. economy may be in recession already. Earlier this month,
Germany's central bank warned that thanks to Brexit worries and U.S.-China uncertainty and
slumping sales of German cars and industrial equipment, that country—the world's
third-largest exporter—is also headed towards recession. Because demand for luxury goods
is highly elastic—Calvin Klein underwear is, unfortunately, no necessity—a fall in aggregate
income would result in a greater fall in demand.
Moreover, even without a recession, luxury brands may be on the decline. There is research
to suggest that today luxury is no longer about flexing one’s wealth but how a brand or
product makes the consumer feel. The Deloitte report argues that consumers who buy luxury
items aren’t doing it to show off, but rather because they feel like they’re getting excellent
quality and, most importantly, the products make the consumer feel good while wearing or
using them. Therefore, brands like Calvin Klein, whose only USP is that they are very
expensive, may see their demand fall as consumer demand rises for brands that focus on
being ethical.
Nevertheless, luxury brands may not be on the decline after all. Research in the UK’s high
streets shows shops that carry luxury brands were not disappearing at the rate of other
products’ stalls. This is because shopping at Gucci is an experience that consumers want to
enjoy, whilst shopping for groceries or cheap clothes is not. Therefore, designer brands may survive the change in consumer tastes and a recession because people would pay
good money for the experience of buying their goods. In addition, tastes tend to be fickle:
although consumers like the idea of ethical clothes now, who is to say they won’t tire of it in
the future?
In the long run, luxury brands may endure falls in demand. Recessions seem to be
temporary and the reputation of designer brands may be too enduring to just vanish after
one period of economic hardship. Because designer brands are so expensive and exclusive,
they are seen as a prize to reward oneself with; when the economy recovers from the effects of Covid-19, consumers may go on a luxury spending spree to celebrate.
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