MONDAY, OCTOBER 20, 2014 BUSINESS Getting used to the ‘new mediocre’ GLOBAL ECONOMY WEEK AHEAD LONDON: Evaporating inflation and slowing growth have put financial markets into such a spin that they could inflict further damage on the world economy. Until a dramatic selloff, exuberant markets had raced well ahead of the economies that underpin them, partly because the US Federal Reserve and other central banks flooded the financial system with new money. With the Fed set to turn off its money taps at the end of this month, investors appear to have woken up to poor growth prospects in much of the world, something International Monetary Fund chief Christine Lagarde has termed a “new mediocre”. It’s not all doom and gloom. The outlook for the world’s largest economy has not suddenly taken a turn for the worse. And a 25 percent plunge in the price of oil since June should put more money in the pockets of com- panies and households. “US momentum has softened a little but we expect growth to remain solidly above trend. At the same time, the drop in oil prices is as much a reflection of supply as demand factors,” economists at Goldman Sachs said in a note. “For consumers in the largest economies, it should provide meaningful relief, offsetting the pressure from tighter financial conditions and weaker global demand.” Fears are centered on recession and even deflation in the euro zone and the extent of China’s slowdown. When the world financial crisis raged from 20072009, China’s resilience was one of the major silver linings. It may not be this time. Chinese third-quarter gross domestic product numbers due tomorrow are forecast to show growth at its weakest pace in more than five years, at 7.2 percent yearon-year. Beijing is expected to roll out a stream of stimulus measures in coming months, though most economists believe it will hold off on an interest rate cut unless conditions deteriorate sharply. Pressure on Germany A poor run of economic data suggests Germany will flirt with recession in the third quarter, having contracted by 0.2 percent in the second. Flash October purchasing managers indices for the United States, euro zone, Germany and Francedue on Thursday-will give a first glimpse of the state of their economies heading into the last quarter of the year. Britain won’t escape the impact of the euro zone’s malaise but is in much healthier shape. Third-quarter GDP data on Friday are forecast to show growth of 0.7 percent in July to September. The International Monetary Fund, United States, G20 and European Central Bank have pressured Berlin to increase public spending to lift its own economy and help its peers in the currency area. But the German government, the only one in the euro zone with the resources to spend more and the heft for it to make a difference, is committed to a balanced budget with no net new borrowing in 2015. The argument will doubtless be reprised at an EU leaders summit in Brussels late next week. France and Italy are pressing for more leeway on debt targets to buy time to push through much-needed structural economic reforms but are likely to have their 2015 budgets rejected by Brussels, leading to a scramble to broker a face-saving deal. The German and French economy ministers have asked experts in Berlin and Paris to come up with reform recommendations for their countries in an apparent attempt to avert a full-blown clash over economic policy. The hope is that a renewed French and Italian commitment to economic reforms will persuade Germany to loosen its purse strings and the ECB to act more forcefully, even crossing its Rubicon and printing money. The ECB has denied there is any “grand bargain” in the offing and officials admit that whatever transpires-the aim is that a deal will be done in time for a December summit-may fall short of what is required. “We now see sovereign QE as unavoidable next year,” said Ruben Segura-Cayuela, economist at Bank of America Merrill Lynch, referring to quantitative easing, or asset purchases with new money. “In a central scenario of a weak economic recovery, where the fiscal stance does not ease meaningfully, and an inflation profile that surprises the ECB on the downside, we believe the central bank will be forced to do more than it has done so far.” The euro-zone’s most pressing problem is Greece, where borrowing costs have rocketed way above the level that would allow Athens to quit the bailout program hated by its people and return to financing itself on the markets. Prime Minister Antonis Samaras insists Athens will press ahead with plans to wean itself off EU and IMF aid. —Reuters MINSK: Workers load beet roots into a railway carriage at the station of Smorgon, some 125 kilometers northwest of Minsk yesterday. —AFP HK protests, China slowdown take sparkle off luxury market PARIS: Protests in Hong Kong, an economic slowdown and anti-corruption drive in China and a coup in Thailand: Asia is no longer a market of constant growth for luxury goods firms. LVMH, world number-one in the sector and owner of brands like Louis Vuitton, Givenchy and Dior, saw its sales drop by three percent in Asia, excluding Japan, in the third-quarter of 2014, a far cry from the halcyon days of 2010-2012. In every other market, LVMH’s sales increased, according to figures published last week. Even activity in sluggish Europe has done better over the past nine months, the group said. The crisis in Hong Kong “will have an impact” on the quarterly results, group finance director JeanJacques Guiony said. “We have already noted some negative impact on activity in duty free shops in the third-quarter.” Arnaud Cadart, an analyst at CM-CIC securities, said there was a “rare comingtogether of economic, monetar y and geopolitical factors that have had a negative impact on the Asian market”. Slowing economic growth in China, along with a clampdown on lavish spending by government officials, is crippling luxury goods firms that are used to viewing the growing pool of wealthy and brand-conscious consumers in the world’s number two economy as a cash cow. Consultants Bain & Company have forecast that the luxury goods market in China will contract for the first time ever this year. This will have a clear impact on companies like Switzerland’s Richemont, Britain’s Burberry and Mulberry and Italy’s Prada, and many luxury brands are reining in their previously rapid expansion. Bain said the slowdown in China, combined with other factors, would put the brakes on the global luxury-goods sector, which the consultancy now sees growing at two percent in 2014 — what it called “the new normal”. Cadart noted that the Chinese market has carried the sector for several years and “couldn’t keep up such a pace in the long-term”. While rich Chinese clients are still seen as the big spenders, these days the big spending tends to be on holiday rather than at home. Still, that’s not to say all luxury firms are putting the skids on the breakneck pace of expansion in China. Hermes cut the ribbon on a glittering new store in Shanghai in September, and the shoe still also fits for Jimmy Choo, whose initial public offering (IPO) launched in London this week was aimed at raising cash to tap into demand in China and Japan. Cognac, wine, watches Luxury goods firms have also complained that a drive to stamp out lavish and ostentatious spending has dried up sales of cognac and expensive wines as well as items such as watches, traditionally given as presents. LVMH said revenues in its wines and spirits division dipped 7 percent in the first nine months of 2014 from a year earlier. French spirit-maker Remy Cointreau this week said sales in the first half of the year had slumped 15.5 percent, dragged lower by weaker demand for its flagship Remy Martin cognac in China. Luxury goods sectors in other countries in the region have also taken a hit from Chinese tourists staying away for a variety of reasons, including a military-backed coup in Thailand in May. Singapore has seen luxury goods clients cut by a fifth, according to Bain. But the biggest dent in the sector is likely to come from the ongoing protests in Hong Kong, a global centre for luxury watches and the high-end goods market in general. Normally, the industr y can count on around 10 to 12 percent of its turnover coming from Hong Kong, and as much as 20 percent for watchmakers such as Richemont and Swatch. In addition to LVMH’s warning about the effect of the protests on profits, watchmakers are already feeling the pain. Retail sales have declined by up to half in the past few weeks, as protesters clog up Hong Kong’s streets and clash with police in the biggest democracy rallies since the former British colony was handed back to the Chinese in 1997. The drop in sales in Asia is also having an impact in companies’ home markets. Tag Heuer watches, par t of the LVMH group, has decided to make 46 people in Switzerland redundant and Cartier will put people on shorter working hours from November. The only bright spot? Japan, where the market in luxury goods is actually growing, even though Japanese clients have lost some purchasing power due to a weaker yen. —AFP