Watch Economic Observatory / Is a global economic slowdown coming? China's slowdown is clear, but...

While major central banks in the US and Europe are accelerating interest rate hikes to curb inflation, the Bank of Japan is sticking to its easy monetary policy. This unique approach has led to a rapid depreciation of the yen, which has in turn fueled rising prices. What impact will this have on demand for luxury watches, which has remained strong despite the COVID-19 pandemic? Leading economic journalist Tomoyuki Isoyama offers his analysis and insights.

Is a global economic slowdown coming? China's slowdown is clear, but...

　In response to rampant inflation (rising prices), the US Federal Reserve has repeatedly raised interest rates significantly. In August 2022, the Bank of England, the UK's central bank, raised interest rates by 0.50% for the first time in 30 years, and in September the European Central Bank also raised interest rates significantly by 0.75%. The Swiss National Bank, which had been maintaining negative interest rates, has also moved away from negative interest rates and into positive interest rates. By raising interest rates, major countries are trying to put the brakes on overheated economies and curb inflation.

　When interest rates rise, borrowing money from banks for capital investment slows down, corporate profit growth halts, and wages stagnate. This suppresses consumption and halts price increases. So, if the economy is put on the brakes, will sales of luxury watches, which are currently selling well worldwide, also decline?

Swiss watch exports reach record high in 2021

　According to the Federation of the Swiss Watch Industry's "Swiss Watch Exports" statistics, which are considered a barometer of global luxury watch sales, exports reached 223 billion Swiss francs (approximately 3.3 trillion yen) in 2021, surpassing the previous record of 22.25 billion Swiss francs in 2014. This is primarily due to a significant increase in consumption in the United States after the COVID-19 pandemic ended, but the boom is still continuing. Cumulative exports to the world from January to July were 11.4% higher than the same period last year. If this pace continues, exports will likely surpass 2021 and set a new record for the second consecutive year, but there is one figure that is of concern.

　For the same January-July period, mainland China, the world's second-largest market after the United States, saw a 19.6% drop compared to the same period last year. Despite being the first country to experience the spread of COVID-19, China successfully contained the virus and was the first to achieve an economic recovery. At one point, it seemed as though it might surpass the United States to become the world's largest watch market, but this spring, the virus spread again within the country. City lockdowns were imposed in cities such as Shanghai, causing the economy to plummet. The impact of this is clearly evident.

　Exports to Hong Kong, the third-largest export destination, also fell 11.6%. As a "free trade port," Hong Kong was once the world's largest watch market, but trade volume plummeted following the implementation of the Hong Kong National Security Law at the end of June 2020. The recent further decline is believed to be due to the worsening economy in mainland China. China's National Bureau of Statistics announced that real GDP (gross domestic product) growth for the April-June period was just 0.4% higher than the same period last year, and this rapid economic slowdown is clearly reflected in Swiss watch exports. Of the 30 export destinations, 28, excluding mainland China and Hong Kong, saw an increase compared to the same period last year.

　Moreover, only three countries (Korea, Kuwait, and Bahrain) recorded single-digit increases, with 25 countries recording double-digit increases of over 10%, including a 28.4% increase in the UK, a 23.3% increase in Germany, and a 31.7% increase in France.

The credibility of currency is declining, and there is a shift to real assets

　Interest rates have risen sharply in the UK and Europe, but will rising interest rates have any impact on luxury watches? While interest rate hikes would be effective in a normal economic boom, this time things are a little different. Money has been printed and distributed around the world to get economies moving again after the COVID-19 pandemic took hold. In other words, the abundance of money in the world has led to a decline in the value of currency and a rise in prices. Some believe that inflation will not subside unless the scattered funds are collected.

　Behind the boom in luxury watches is a movement to shift from currency to real assets, as the credibility of currency has declined due to massive handouts. In the United States, despite a significant interest rate hike, the economy remains strong, wages are rising, and inflation shows no signs of subsiding. Many people are still afraid of inflation and are moving to preserve their assets with real assets.

　Inflation has finally begun in Japan, raising concerns about an economic downturn. Meanwhile, the value of the yen has fallen significantly, with the exchange rate now at 145 yen to the dollar. While luxury goods like watches are typically the first to be shunned when an economic downturn worsens, the desire for physical goods to avoid the loss of asset value caused by a weak yen remains strong. At least until the end of the year, the US, Europe, and Japan will absorb the effects of China's slowdown, and the watch market is likely to remain thriving at a high level.

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/