Watch Economic Observatory / Ukraine War Shocks: The Future of the Highest-Ever Luxury Watch Market

Swiss watch exports in 2021 surpassed pre-COVID-19 levels, reaching a new record high. Just as the economy was finally beginning to make a major move toward a full-scale recovery, Russia invaded Ukraine. Will the global economy once again slip back into stagnation and slowdown? Leading economic journalist Tomoyuki Isoyama analyzes and considers the impact of the Ukraine war, particularly from the perspective of luxury watches.

Ukraine war shocks luxury watch market to record high

　Russia's war of aggression in Ukraine is causing a major disruption to the luxury watch market, which was just beginning to recover from the COVID-19 pandemic.

Swiss watch exports reach new record high in 7 years in 2021

　According to statistics from the Federation of the Swiss Watch Industry, which tracks trends in the luxury watch market, the total value of Swiss watches exported worldwide in 2021 was 22,296.7 million Swiss francs (approximately 2.595 trillion yen), a 31.2% increase compared to 2020, which was affected by the COVID-19 pandemic. This not only surpassed the 21,717.7 million Swiss francs in 2019, but also surpassed the previous record of 22,257.7 million Swiss francs set in 2014 for the first time in seven years. Even in 2022, exports have been performing well, increasing 6.8% in January and 24.4% in February, and a strong tailwind is beginning to blow into the watch market as the global economy recovers in the post-COVID era.

　Just then, the situation changed dramatically with Russia's invasion of Ukraine in late February. The strong economic sanctions imposed on Russia by Western countries will not only deal a major blow to the Russian economy, but rising energy prices, including crude oil and LNG (liquefied natural gas), are likely to drag down the global economy. Since last year, Europe and the United States have been hit by inflation, with consumer prices soaring alongside their economic recovery. The sharp rise in energy prices could further exacerbate this, pushing the world into further inflation.

　Russia ranked 17th among export destinations for Swiss watches in 2021. While the total amount was only 260.1 million Swiss francs (approximately 337 billion yen), it was a market that was expected to see increased demand from the newly wealthy. However, this market will "disappear" for the time being. In addition, many Russians have assets, such as savings in Switzerland and other European countries, and it is believed that the purchases of luxury watches by these wealthy Russians were not insignificant.

The future of the two major markets: the US and China

　Furthermore, rising energy prices in Europe have had a direct impact on household budgets, raising concerns that a trend of refraining from purchasing other consumer goods will spread in the future. Of the top 30 countries and regions for Swiss watch exports in 2021, half (15 countries) exceeded 2019 levels before COVID-3, but only three small European countries - the Netherlands, Ireland, and Belgium - were included, with the other major European countries falling short of 2019 levels. The consumer economy had not yet fully recovered when the Ukraine war broke out.

　Future market trends will depend on the outcome of the two major markets, the United States and China. In 2021, the United States regained the top spot as the export destination for Swiss watches, surpassing China's 2,967.2 million Swiss francs with 3,078.8 million Swiss francs. Last year's Christmas shopping season in the United States was a feverish one, with luxury watches selling like hotcakes. China, which recovered quickly from the COVID-19 pandemic, is also expanding its market. Exports to Hong Kong, once the world's largest market for watches, are also on the rise.

The impact of the Ukraine war on the watch market

　The question is what will happen to both countries' economies as a result of the Ukraine war and its aftermath. One focus will be whether US consumption will continue to be strong. Another is the future of China, which continues to pursue a "zero COVID policy" to contain the COVID-19 pandemic. A resurgence of the virus has led to lockdowns in several cities, and attention is focused on the extent of damage this will inflict on the Chinese economy as a whole. If the Chinese government were to begin supporting Russia, there are concerns that economic sanctions by Western countries could be extended to include China. This could deal a major blow to the global economy.

　However, with inflation sweeping the world, demand for some ultra-luxury watches is sure to increase significantly. In order to weather inflation, which is causing currencies to lose value, many wealthy people will increasingly convert their cash into "real assets." The rapid rise in gold prices is a sign of this, and there is also demand for luxury watches. For now, only a very small number of the super-rich among Russia's wealthy have had their assets frozen, and the rest will likely try to transfer their foreign currency-denominated assets into "real assets." When this happens, there is a good chance that funds will move into luxury watches, which are assets that are difficult for the government to capture.

　What impact will the war in Ukraine have on the global economy? And how will it affect the watch market? We'll have to keep an eye on it for a while.

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/