It is the question being asked not just in the sepulchral corridors of the Treasury, but in every corner of the globe: can consumer spending save the world from a recession? With manufacturing in negative growth in the US and the UK, the services sector seems to be the last line of defense against the "R" word.
And so far the effects of terrorism and an economic downturn have had only a limited effect on how Joe and Joanna Public spend their money. British retail sales in September remained relatively buoyant, rising by 0.2 percent on the previous month and slipping only 0.1 percent in October. Last week the US, which so often influences how other economies will perform, reported a 7.1 percent increase in retail sales in October, the highest rise on record, thanks largely to cheap credit deals from the big car manufacturers.
But these figures could be misleading. The signs are that consumers are starting to change their spending habits as they see unemployment figures rise and a seemingly endless stream of profits warnings pound the stock market. The worry is that a brief slip in consumer confidence in the wake of Sept. 11 is now giving way to much more profound concerns raised by a deteriorating economy.
Stark distinction
As such consumers, both in the US and the UK, seem to be making a stark distinction. While they are happy to continue buying core goods and services, they are increasingly reluctant to shell out on the more discretionary spending -- such as leisure and fashion - -- in such uncertain times. The luxury goods market, in particular, is reeling from a drastic downturn as upmarket shoppers keep their hands in their pockets. Over in the US, jeweller to the stars Tiffany & Co, last week reported third-quarter sales down a worrying 10 percent on the same period the previous year.
Back in Europe, luxury goods house LVMH, which owns labels such as Givenchy and Dior, issued its third profits warning in two months.
The French company said that October's sales were down 5 percent, having fallen by 8 percent in September. Champagne sales are thought to have fallen by as much as 10 percent. LVMH said it expected operating profits for the current year would be between 10 and 15 percent below last year's total of US$2.8 billion. A few months ago LVMH had been predicting double digit earnings growth.
The French luxury goods market -- along with the UK, Europe's most important -- is having a torrid time overall. Sales on the luxury floors of department store Printemps are down 25 percent since Sept. 11.
Meanwhile Swiss rival Riche-mont, whose brands include Cartier, said it expects its earnings for the six months to September to be down 20 percent. Ireland's Waterford Wedgwood Ireland, announced 1,400 jobs were to go after it unveiled a 4.5 percent drop in sales.
Overall, the European luxury goods sector is down nearly 30 percent on the year to date, according to analysts at Morgan Stanley.
Feeling the pinch
Luxury hotels are feeling the pain, too, not just because people are staying put after Sept. 11 but because of the wider economic downturn. Leisure analysts Pannell Kerr Forster reported that London hotel bookings were down 20 percent in September. Last week the Hilton Group revealed room rates at its five-star hotels had plummeted by almost a third during September and October.
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