The threat of a new recession, volatility of raw materials or instability around the world. Fashion faces a convulsive year.
The new year promises to be convulsed again. Elections in the United States, instability in emerging markets or volatility of raw materials will mark the next twelve months in the fashion industry. On the horizon, the new threat of recession that has the sector in suspense.
Economy under the threat of recession
The slowdown of the great world economies has fueled the fear of a change in the economic agenda. Trade, one of the engines of the world economy, is threatened by trade war between the United States and China.
The first alarm symptoms were given by Germany. After a decade of uninterrupted growth, the Gross Domestic Product (GDP) of the country fell in the second quarter of the year, opening the door to a recession.
This stabilization of the economy makes most economists foresee that the economic growth cycle will still be extended for a few years and that a new crisis, if arrived, would not be as deep and long as the one in 2007.
Fashion is one of the most exposed sectors, being a dispensable asset. In the last crisis, companies like Tiffany were the first to suffer the impact of the recession. The difference is that now, the potential cycle change would catch the sector in the low, after several years of dropping sales.
Dealing with low interest rates
Despite the end of the crisis, the economic recovery in recent years has not been strong enough to allow the European Central Bank (ECB) to raise interest rates that have been low since mid-2016. Moreover, in November, the entity had to lower interest rates on deposits by ten points. The European Union has not been able to reach the inflation target of 2%, which has caused that the ECB, led by Mario Draghi, has not been able to increase interest rates in recent years.
For its part, the US Federal Reserve announced its first reduction in interest rates since the last crisis. In total, lower them by 50 points in two consecutive cuts in July and September. Companies have found a way to fight low rates with long-term financing.
Rates also have a direct impact on the fluctuation of currencies, an indicator that affects a sector as globalized as fashion, which is mainly supplied in dollars and sells in a wide variety of currencies.
The end of Brexit
The victory of Boris Johnson in the general elections held in the United Kingdom on December 12 has paved the way for the definitive exit of the country from the European Union on January 31. Both parties have less than a month to sign an agreement that would contemplate the payment of 39 billion pounds (50 billion dollars) by the United Kingdom to the European Union and that Northern Ireland remains within the union. In addition, the new British government will have to deal with the Scottish demand to hold a new independence referendum.
The United Kingdom is one of the main markets for international fashion. For US companies, it is a favorite hub to begin its expansion in Europe and to establish its headquarters for the region, and for European fashion is the second largest market in sales, after Germany.
The aging of the population
The world’s major economies are experiencing a process of demographic aging. This fact, coupled with a greater life expectancy, will lead to an increase in retirees and dependency rate. The aging of the population has thus become an economic challenge that governments and companies will have to face in the coming years.
For fashion, aging opens a new market, the silvers, to which the sector has not paid much attention so far. Instead, millennials and the Z, the favorite target of fashion companies, will lose power.
Will tourism continue to slow down?
International travelers are one of the main engines of the global fashion business. It is estimated that travel retail moves more than 70 billion euros per year, with fashion and cosmetics as the main sectors. In 2019, Euromonitor expects a global tourism increase of 4.2%, with 1.5 billion trips made in the hundred cities with more international arrivals.
But the map is changing. In 2019, Hong Kong, Bangkok and London were the three most visited cities in the world, although the Chinese city was where it fell the most, with a decrease of 10.3%. Neighbor Macao, on the other hand, led the increases, up 9%.
Another ‘shaken’ year for raw materials
Raw materials have ended another year of highs and lows. Economic slowdown and trade war affected cotton consumption during the 2018-2019 campaign, when it dropped by 1%. Crop, on the other hand, reduced by 1%, which added to a 2% decrease in yield that led to a 3% drop in production. The International Cotton Advisory Committee (Icac) warned that this trend will continue over the next few seasons due to uncertainty, coupled with the usual risks that agriculture faces.
Oil, meanwhile, ended the year at 66 euros, although at the start of the year it has moderated its escalation after the US attack against Iranian general Qasem Soleimani. “Geopolitics is back on the table and that is something that will have important implications for most assets,” said Salman Ahmed, head of investment strategy at Lombard Odier, last week.
Instability in Latin America
Some media have defined 2019 as the year of protests. In Chile, the Santiago Stock Exchange has ended 2019 as the worst in the world after three months of street riots. The protests, which began as demonstrations against rising transport prices, have ended with the army in the street and the country in recession.
The situation has aroused all the alarms in the fashion industry, which in Chile had one of the most stable markets in the region. In Bolivia, less relevant for the sector, the protests against the electoral “pucherazo” motivated the exit of the country of the president, Evo Morales, exiled in Buenos Aires.
It remains to be seen how Mexico will evolve, with the economy very weakened, and Argentina, immersed in a deep recession, as well as Brazil, which faces the second year of Jair Bolsonaro in the presidency.
Latin America generates sales of 160 billion dollars a year for the fashion sector, more than in Middle East, and the sector grows more than in Asia. The country is the natural destination for American companies in their international expansion and a refuge from the fluctuations of consumption in their local market: Forever21, for example, closed its international stores across the globe except in the Latin American market.
Crisis in Hong Kong
Across the world, in Hong Kong, protesters have been on the street for seven months now to protest against Chinese interference and what they consider to be a weakening of a country’s model, two systems. The trigger for the protests was a law of extradition to the continent, which has already been repealed. In November, the Democratic opposition swept through the municipal elections, which had record participation, but the crisis seems, for now, stranded.
The special administrative region is one of the main markets in Asia for fashion, especially for luxury. Its high purchasing power, the flow of tourists and its international opening have made Hong Kong the gateway to China, but protests endanger that status.
“The effects of the trade war will last a generation.” This is how blunt Kristalina Georgieva, managing director of the International Monetary Fund (IMF) started one of her first speeches as head of the institution.
The battle between the two main world powers is on the agenda of entities and governments, being China the world’s largest producer in the sector and the United States, its main customer.
Due to the impact of tariffs, fashion sales in the United States will drop by 5% this year, according to forecasts made by Moody’s in November. However, the conflict seems to have begun to stabilize, after Donald Trump and Xi Jinping announced that the first truce of the agreement will be signed on January 15.
United States Elections
Donald Trump will play his second term this year, with more support than ever among his people despite the impeachment process. The last quarter of 2019 was the best period for receiving funds for the re-election of the current president, with 46 million dollars.
Voting by Democratic Party primaries kicks off in February and former vice president, Joe Biden, and Senator Elizabeth Warren, the president start as favorite in the polls. Fashion will once again see the elections, which will determine the roadmap of its largest world market and the evolution of the protectionist trend led by Donald Trump during his term.