A hard landing for Europe?

This is an audio transcript of the FT News Briefing podcast episode: ‘A hard landing for Europe?’

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Marc Filippino
Good morning from the Financial Times. Today is Thursday, August 3rd, and this is your FT News Briefing. 

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Investors are feeling bearish about the eurozone economy. And shoppers are feeling bearish about luxury goods. Plus, Nissan is trying to re-establish its electric vehicle presence in China, but it’s gonna have to elbow its way back into a pretty crowded market. I’m Marc Filippino, and here’s the news you need to start your day. 

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Investors are upping their bets that Europe is headed for a painful economic downturn. The euro has fallen against the dollar over the past two weeks, and European stocks have dipped recently. Economic indicators in the eurozone are deteriorating as the European Central Bank raises interest rates. And higher prices are still a threat. Services inflation in the eurozone hit a record high last month. Meanwhile, investors are taking a different approach in the US. They’re betting that the country is headed for a soft landing. Government data shows that the US economy grew faster than what economists had forecast for the second quarter, and inflation fell more than expected in June. 

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Customers spent big on luxury items like handbags during the pandemic, but now they’re starting to get a little bit more conservative. The FT’s US business editor Andrew Edgecliffe-Johnson recently wrote about the luxury sector growth slowing, and he joins me now. Hi, Edge. 

Andrew Edgecliffe-Johnson
Hi, Marc. 

Marc Filippino
So let’s back up a little bit. Luxury brands were growing like crazy during the pandemic. They broke records. Why was that? 

Andrew Edgecliffe-Johnson
Well, if you remember, there was a period, of course, where nobody could spend very much money on anything. And then there was a period where governments were throwing a lot of cash at consumers to . . . in stimulus programs. And as soon as people could get out of their living rooms and start spending again, there was a revenge branded spending spree, as analysts start to call it. And 2021 and 2022 in particular were absolutely exceptional years for luxury. And that was really people catching up with all the stuff they weren’t able to do back in the early months of 2020 as Covid first locked us all up in our homes. 

Marc Filippino
So are people keeping up with these lifestyles? Are they still revenge buying? 

Andrew Edgecliffe-Johnson
Well, the luxury sector around the world is still growing pretty strongly. We had earnings recently from a lot of the big luxury groups — LVMH, Prada, Burberry and Richemont — some of them talking about double-digit growth, you know, 20, 30, 40 per cent in some regions. But the one region that is standing out as an exception is the US. So Prada and LVMH said that their sales in the US had contracted by about 1 per cent. Richemont, which owns Cartier, saw sales in the Americas down about 2 per cent. Burberry’s were down 8 per cent. So we went looking to find out what’s happening here. And it seems as though we’ve got a couple of things going on. There is a sort of normalisation after this splurge in luxury spending earlier in the pandemic. We’re seeing some of the more inflation-sensitive customers, who may not be the really rich super luxury buyers but they’re what’s generally called the more aspirational category of buyers, who are pulling back. And then you have the fact that one of the things we want to do as part of our revenge spending is travel. And a lot of Americans, they are buying the Chanel dress in Paris rather than at the Chanel store in midtown Manhattan.

Marc Filippino
Mmm. So is anyone hopeful about the luxury sector? 

Andrew Edgecliffe-Johnson
I’m . . . To be clear, this is not a crisis. Even in the US, it is a contraction. It’s generally being seen by analysts we speak to as something of a return to the pre-pandemic pattern. But it is definitely affecting a lot of businesses in the short term. And one of the things that we took a look at, particularly in that aspirational spending category, is how spending on things like hot tubs has really fallen off in the last quarter. Things like the sort of entry-level luxury goods categories, like streetwear, small purses, handbags and entry-level sneakers, these are where we’re seeing the biggest squeeze right now. That is gonna be a little tricky for a while. Certainly the analysts we spoke to don’t see this getting better until the end of the year, probably sometime into 2024. 

Marc Filippino
Andrew Edgecliffe-Johnson is the FT’s US business editor. Thanks, Edge. 

Andrew Edgecliffe-Johnson
Thanks, Marc. 

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Marc Filippino
Carmakers Nissan and Renault finalised a historic deal last week that restructures their relationship. With the state of the alliance sorted, Nissan can now focus on regaining ground in China, which might be a bit of an uphill battle. The FT’s Tokyo bureau chief Kana Inagaki recently wrote an opinion piece on Nissan’s challenges in China, and she joins me now. Hi, Kana. 

Kana Inagaki
Hi, Marc. 

Marc Filippino
So let’s start with the deal itself, Kana. What exactly got it over the line? 

Kana Inagaki
Yeah. So it’s a long delayed deal and the negotiations have been going on for months and months. But in the end, basically the two companies have removed the biggest source of their tension, so they rebalanced their capital relationship. Renault will now own 15 per cent in Nissan and Nissan will also gain voting rights for its own 15 per cent holding in the French carmaker. So that makes an equal capital alliance. And also, I mean, the reason why this finally came through is because Nissan agreed in the end to invest €600mn in Renault’s new division for housing its electric vehicle and software technology. So that was really what got the talks over the line. 

Marc Filippino
So now that the deal is done, Kana, you wrote in a recent opinion piece that Nissan really needs to focus on its presence in China. Why has it been struggling there? 

Kana Inagaki
So to be fair, it’s not just Nissan that is struggling. A lot of the major global carmakers have struggled in China, especially in recent months. And this is because there’s been a rapid rise of local Chinese electric-vehicle makers. And also a lot of the carmakers have really underestimated the pace of the transition to electric vehicles in the world’s largest car market. But Nissan also had its own problems because actually it’s not just the electric vehicles. Actually, their petroleum cars, the sales of that is also falling behind. So analysts have said that perhaps there’s been an erosion of brand strength for Nissan that has led to their struggling performance in China. 

Marc Filippino
So how does Nissan rebound in China now? 

Kana Inagaki
So, I mean, this isn’t the only reason, but it is true that Nissan has been distracted by these negotiations that it’s been carrying out with its alliance partner Renault. And so once this deal has been signed, obviously this does allow them to concentrate on its strategy in China. And Nissan has said in the recent earnings briefing that they are going to bring forward the rollout of electric vehicles. Clearly, they are aware that they are falling behind, and they will need to accelerate the shift to electric vehicles. But they also have the task of recovering their brand image. So even with the petroleum cars, they will need to, you know, revive the strength of their brand. 

Marc Filippino
Kana Inagaki is the FT’s Tokyo bureau chief. Thank you, Kana. 

Kana Inagaki
Thank you, Marc. 

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Marc Filippino
Right. Before we go, today we’re keeping an eye on the Bank of England. The central bank is expected to raise interest rates by a quarter of a percentage point. That’s because inflation in the UK is still really high. It’s nearly 8 per cent. That is well above BoE’s 2 per cent target. 

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news. 

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