China's economy outperformed forecasts in Q2. Why is this good for the luxury market?

Unexpectedly rapid growth in the Chinese economy in the second quarter was a rare positive story in a pessimistic year for the luxury industry. However, China's strong GDP data does not cancel out the structural risks holding back consumption in a country that accounts for a quarter of global luxury sales.

The world's second-largest economy grew 5.2 percent in the second quarter on an annualized basis, reported China's National Bureau of Statistics. The increase was driven by exports and subsidies that supported industry. The result was above the Nikkei consensus forecast of 5%, but weaker than the 5.4% rise in the previous two quarters. Тем не менее, страна сохраняет курс на достижение в 2025 году целевого показателя ВВП «около 5%», пишет Nikkei.

Published figures show that China's economy remains resilient despite the Donald Trump administration's volatile trade policies. After sharply raising duties on Chinese goods to prohibitive levels of 145%, Washington lowered them to 55% in May - for the duration of a truce that expires Aug. 12. 

However, macro data also point to a chronic imbalance in the Chinese economy that could worsen in the second half of 2025: low domestic demand and a glut of goods. The country is experiencing its longest period of deflation in decades - hurting corporate profits and wage dynamics, notes Nikkei. Consumer confidence is further weakened by the ongoing downturn in the housing market - real estate accounts for about 70% of Chinese household assets.

Luxury brands have a reputation for targeting the rich. But more than half of global sales of luxury goods are provided by hundreds of millions of middle class people - they spend less than 2 thousand euros a year on such purchases. "The spending of the wealthiest buyers is money that is always present. But the bottom of the pyramid depends on GDP and what happens to household incomes," The Wall Street Journal quotes Filippo Bianchi, managing director of Boston Consulting Group.

This explains the phenomenon of the Chinese luxury market. In the decade between the global financial crisis and the coronavirus pandemic, the country's economy grew at an average annual rate of 8%. As the wealthy Chinese became even richer and the middle class broadened, both groups sought Western luxury brands to demonstrate their social uplift. In 2000, Chinese shoppers accounted for just 1 percent of global luxury sales, according to UBS. Today, it's already about a quarter, notes the WSJ.

Donald Trump's trade war has dashed expectations of a luxury market recovery - The U.S.-China trade conflict has the potential to severely erode consumer confidence in the world's two largest economies, which account for about half of luxury sales,

US firm Bernstein, which provides independent advice to institutional investors, revised its forecast for the luxury sector in April: instead of the previously expected 5% growth, Bernstein projected a 2% decline in revenue in 2025 due to increased economic uncertainty. Bernstein analyst Luca Solca maintained his downgraded forecasts for the sector even after Trump announced a delay in imposing duties. "A return to previous performance, as if what happened was just a nightmare, is ruled out. We have significant damage in financial markets and the economy as a result of inconsistent policy announcements," Solka said.

"Our base case scenario now assumes that any recovery in the luxury segment will be delayed until 2026," said the FT one banker working with the luxury industry. Despite the possibility of a tariff review by Trump, "most of the damage has already been done," he added.

Global luxury sales could decline by 2-5% in 2025, according to a forecast by consultancy Bain & Co. While 75% of luxury shoppers surveyed by Bain said the duties are unlikely to make them buy less luxury goods in the future, about half of those who have already reduced purchases over the past year explained it to rising prices, reporting a decrease in the price of luxury goods.

It's not just Trump's fault for rising luxury prices. Luxury brands, for whom discounting is unacceptable, are now paying the price hike pandemic price hikes with falling sales. According to Bernstein, luxury manufacturers raised prices by an average of 36% between 2020 and 2023 - twice the rate of inflation in the US. The symbol of "greed-flation" in the luxury industry was Chanel's Classic Flap bag. This handbag, which cost $5,800 on average in 2019, will cost an American buyer today already $10,800, notes WSJ.

This article was AI-translated and verified by a human editor