7 minute read
China’s Luxury Boom Is Cracking – And Brands Are Feeling It
- China’s once unstoppable luxury demand is fading fast, turning a major growth engine into a growing liability
- With consumer confidence at rock bottom, even industry giants like LVMH and Kering are struggling.
What you need to know: China’s luxury market, once a powerhouse for global brands - such as LVMH and Kering - now faces headwinds as economic uncertainty, fading confidence, and shifting buying habits sink consumer demand.
Why it matters: For 15 years, luxury brands thrived on China’s spend-happy consumers. Before the pandemic, they made up 35% of global luxury sales. That share was set to hit 45% by 2025. But with the economy slowing and consumer confidence plunging, that forecast is now in doubt. The boom has flipped to bust, and luxury brands are feeling the pain.
Now the Deep Dive: It looks like luxury’s ‘golden era’ in China continues to unravel.
To put this into perspective, Chinese consumers accounted for 20% of global luxury sales in 2020. But four years later (2024), that share had shrunk to 12%.1
Thus, once the industry’s biggest growth engine, China is now its biggest liability.
Major brands aren’t ignoring the slowdown either. But how could they? None of them are likely immune.
For example2:
- Kering (Gucci, Balenciaga) reported a 15% drop in Q3 2024 amid declining Chinese sales.
- LVMH saw revenue dip 4%, with China and its neighboring markets sinking 16%.
- Swatch Group (Omega, Tissot) took the biggest blow – sales were down 12%, profits were slashed 75%, and a 30% plunge in Greater China.
After years of over-relying on China, luxury giants now face a harsh reality. . .
How do you replace consumers from the world’s second-largest economy? It's not easy.
But there is some good news from this.
There will likely be price cuts as brands scramble to move inventory, thus buyers might just get their luxury goods for less.
But for these firms, that could mean shrinking profits. And with Chinese consumer confidence scraping all-time lows (see chart below), they shouldn’t hold their breath.
- Weak confidence = less luxury spending = shrinking profits.
So, will China’s consumers bounce back? Time will tell (I’ve covered China’s economic struggles in detail a few months back - The Great Wall of Worry: Is China on the Brink of a Balance Sheet Recession?)
Just don’t check that luxury watch too often.
Figure 1: St. Louis Federal Reserve, Dunham, February 2025
Housing in America: A Dream? More Like A Dilemma
- Homeownership is slipping out of reach, with the average household needing 40% more income than it earns to afford a typical home.
- With affordability at its worst since 2007–08, more buyers are relying on debt, stretching finances thin, and hoping for lower rates to bail them out.
What you need to know: Home affordability continues to plague U.S. households as the cost to afford a home continues outpacing income by a significant amount.
Why it matters: Home affordability isn’t just about housing - it’s an economic warning. When home prices outpace income, wealth-building stalls, renting rises, wealth inequality deepens, and financial stress grows. This squeeze impacts everything from consumer spending to retirement and even family formations (having children, etc). If affordability continues on this path, there could be some significant issues.
Now the Deep Dive: Housing affordability continues to stress on U.S. households.
Latest data from the Atlanta Fed now says a median-income household must spend 42% of its earnings to afford a median-priced home - far above the 30% affordability benchmark and the worst since 2007–08.3
The cause? Surging home prices and much higher interest rates.
But I believe the bigger problem is the widening affordability gap - and it’s only getting worse.
- Put simply, a household now needs $119,640 to afford a typical home while staying below the 30% income-to-cost ratio - a staggering 40% more than the current median income of $85,255 today.
Keep in mind that household income is counted as at least 2 or more people and pre-tax income.
And with home prices outpacing wages, more buyers are filling the gap with debt, stretching their finances further and further, hoping to refinance at a lower rate later.
Thus, unless wages surge or prices and rates drop, homeownership will stay a burden for many households.
Relief may come if the Fed keeps cutting rates and rent growth further declines. But with wage growth also cooling, homeownership will likely stay a burden for many.
At this rate, the real estate market’s hottest trend might be moving back in with your parents.
Figure 2: Atlanta Federal Reserve, October 2024
Germany at a Crossroads: A Far-Right Surge That Could Reshape Europe
- For the first time since WWII, a far-right party (AfD) is set to finish second in a federal election, threatening to reshape Germany’s political landscape.
- With economic stagnation, immigration tensions, and rising inequality fueling discontent, Germany’s political crisis could destabilize Europe and strain U.S.-EU relations.
What you need to know: Germany’s political system is at a breaking point as far-right support surges and mainstream parties lose ground. For the first time since WWII, a far-right party (AfD) is poised to finish second in a federal election - leaving the country deeply divided. Sunday's vote may be the last chance for centrists to regain control.
Why this matters: Germany is Europe’s largest economy and a pillar of political stability for the European Union - but cracks are showing. Economic stagnation, rising inequality, and tensions with immigration debates have fueled discontent - pushing voters toward right-wing populism. If mainstream parties fail to deliver change, Germany could follow the path of France and Italy, where centrist parties recently collapsed, and instability took hold.4
Now the Deep Dive: Germany’s once-stable political system is nearing a tipping point - with potential economic ripples worldwide.
Like other European nations grappling with political turmoil, Germany faces rising economic hardships via two years of contraction, an aging workforce, immigration issues, and capital flight - all of which have shattered public confidence.
Now, with far-right AfD polling at 20% and its nationalist agenda gaining traction - centrist parties holding control are in crisis.
Tensions boiled over in January when Foreign Minister - Annalena Baerbock - clashed with conservative lawmakers in the Bundestag (aka Germany’s equivalent of Congress).
Meanwhile, CDU leader - Friedrich Merz - warns that if Germany fails to revive its economy and control immigration, the country could fall fully into right-wing populism by 2029 - something not seen since the Nazi era.
And this crisis isn’t just about Germany - it has major ripple effects across the world.
- Europe’s political stability is already fragile, with populist movements gaining ground in France, Italy, Austria, Slovakia, and Hungary - shaking confidence in the Euro and the future of the EU (I covered this recently in Fragile by Design? Why the Euro Struggles to Rival the U.S. Dollar).
- The U.S.-EU alliance is at risk, as Donald Trump’s administration considers cutting side deals with Russia on Ukraine - leaving Germany out in the cold as power in Eastern Europe is changed.
- Economic uncertainty looms, with investors closely watching Germany’s slowing economy, widening wealth inequality, and rising competition from Chinese automakers - a major threat to its top industry.
The stakes are pretty high. If mainstream parties fail to persuade voters, Germany could face huge political and economic changes.
German voters hit the polls this Sunday (February 23rd), and the future of Europe – and possibly the EU - may hang in the balance.
Figure 3: Bloomberg, February 2025
Anyway, who knows what will happen?
This is Just some food for thought as we watch how these trends develop.
As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.
Sources:
- China’s Love Affair With Luxury Has Cooled - WSJ
- Luxury goods: Salvo of poor quarterly results confirms storm warnings
- Introducing the Atlanta Fed’s Home Ownership Affordability Monitor (HOAM) 2.0 - Federal Reserve Bank of Atlanta
- What’s in Store for Germany as Far-Right AfD Eyes Big Election Gains?
Disclosures:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.