Watch Economic Observatory: The US-China battle for dominance in the watch market. Will the US, with its strong consumption, come out on top?

Jerome Powell, whose four-year term ends in February 2022, has been reappointed as Chairman of the Federal Reserve (FRB). The US economy is reportedly both strong and slightly overheated. Because the Chairman's monetary policy has a significant impact on the global economy and financial markets, his remarks attract considerable attention. As the struggle for hegemony with China, led by President Xi Jinping, continues, how will Fed Chairman Powell steer the country? Leading economic journalist Tomoyuki Isoyama analyzes and considers the US economy from the perspective of luxury goods demand.

The US and China are competing for the top spot in the watch market. Will the US, with its booming consumption, come out on top?

The US economy is booming. GDP (gross domestic product) grew 6.7% year-on-year in the second quarter (April-June), and although it slowed in the third quarter (July-September), it maintained positive growth at 2.0%. Personal consumption grew 11.4% in the January-March quarter and 12.0% in the April-June quarter, driving the economic recovery. The spread of COVID-19 led to significant restrictions on economic activity in 2020, including lockdowns. However, once those restrictions were lifted in 2021, consumer spending exploded, sparking what has been described as "revenge spending."

Luxury goods sales are booming

　In the July-September quarter, economic activity slowed due to the resurgence of COVID-19 infections caused by the spread of Delta stocks, and automobile production was unable to keep up with the global semiconductor shortage, causing personal consumption to slow to a 1.6% increase. However, it still maintained a positive growth rate, indicating the strength of the US economy. Much attention is focused on how much US consumption will pick up ahead of the Christmas shopping season, the peak demand period.

　Amid this, sales are booming for luxury goods such as high-end watches and jewelry. This trend is also reflected in data from the Federation of the Swiss Watch Industry, which we often cover in this column. According to data on Swiss watch exports by country and region, the cumulative value of exports to the United States from January to October 2021 was 2.518 billion Swiss francs (approximately 307 billion yen), an increase of 60.4% compared to the same period in 2020.

　Among the 30 major countries and regions, this is the highest growth rate, excluding the small country of India. Moreover, it is up 27% compared to the period from January to October 2019 before the COVID-1 pandemic, completely surpassing pre-COVID-10 figures. With strong sales, dealers are likely significantly increasing their inventory ahead of the Christmas sales season at the end of the year.

What will be the top destination for Swiss watch exports in 2021?

　The biggest focus at this point is which city will emerge as the world's largest demand source for Swiss watches in 2021.

　Until 2019, Hong Kong had reigned as the top export destination for Swiss watches for a long period after the war. However, in 2020, when the National Security Law was enacted in Hong Kong, the "Free City of Hong Kong" was extinguished and Swiss watch exports plummeted. Exports to mainland China, which recovered quickly from the COVID-19 pandemic, increased by 20% from the previous year to 2.394 billion Swiss francs (approximately 294 billion yen), taking the top spot. Exports to the United States, which was hit hard by the COVID-19 pandemic, fell 17.5% to 1.9867 billion Swiss francs (approximately 244 billion yen), remaining in second place.

　However, statistics up to October 2021 show that the US is just barely in first place with 2,501.8 million Swiss francs, as mentioned above, beating out China, which saw a 39.8% increase from the same period last year, at 2,497.2 million Swiss francs (approximately 3064 billion yen). Will the US maintain its lead and claim the title of the world's largest market, or will China (mainland) overtake it and maintain its top position for the second year in a row? We will be keeping a close eye on the US-China battle for supremacy in the Swiss watch market.

Inflation is on the rise in the US economy

　However, the US economy is slightly overheating, and the Federal Reserve, the US central bank, has announced a plan to gradually reduce the quantitative easing it has implemented as an economic measure in response to the COVID-19 pandemic, and is expected to move away from its essentially zero interest rate policy. The more the US tightens monetary policy, the more the economy has overheated, and prices are soaring.

　The U.S. Department of Labor announced that the Consumer Price Index (CPI) for October 2021 rose 6.2% compared to the same month last year, marking the highest increase in 31 years since December 1990. Resource prices, including crude oil, have been rising globally, and the "core index," which excludes energy and food prices, also rose 4.6%. So-called inflation is beginning to take hold.

　However, there are few views that the economy will slow down even with the tightening of monetary policy, and there is a strong view that demand for luxury goods will increase ahead of the year-end shopping season. Inflation is becoming a global trend, and rising prices of other consumer goods and logistics costs are expected to push up the prices of luxury watches, which appears to be creating a rush of demand.

Tomoyuki Isoyama
Economic journalist and professor at Chiba University of Commerce. Born in Tokyo in 1962. Graduated from the School of Political Science and Economics at Waseda University. Served at the Nikkei Inc. as a securities reporter, deputy chief of the same department, Zurich bureau chief, Frankfurt bureau chief, and deputy editor-in-chief and editorial committee member for Nikkei Business. Left the company in 2011 to go independent. Covers a wide range of political, government, and business figures. His books include "The International Accounting Standards War: Final Chapter" and "The Secrets of Switzerland, the Brand Kingdom" (both published by Nikkei BP).
http://www.isoyamatomoyuki.com/