Global consumer resilience vs a global recession

The US consumer confidence ticked higher in March after two months of declines amid rising costs and fears of an economic slowdown. But despite these concerns, spending levels haven't been negatively impacted yet.

Consumers have been feeling the pinch in almost all spheres of spending especially grocery and gas bills. Higher prevailing rates over the last 12 months have indeed pushed the cost of borrowing higher too. But if you look at the data, the real income - that’s consumer income minus inflation – was down 6%. But the real consumption, real PCE, was up 3%.

One way of understanding this resilience is to blame excessive consumer savings that accumulated during COVID-19 lockdowns. Not only did consumers have lesser avenues to spend money but they also accumulated stimulus checks and enjoyed higher than normal investment income.

Additionally, when dissecting company related data – overall consumer spending helped top-line growth outpace market expectations. Part of this is because consumers are financially healthy. Part of it is also the fact that inventories built up over 2020-21 are now sitting on shelves and companies are promoting these more. To add to this, a lot of it was also driven by higher pricing. So even if consumers are buying fewer items, they are paying more for them and companies are ultimately benefiting.

We are however starting to see some signs of inflection. Inventories are coming down and that means less pressure for retailers to promote more. The cost for supply chains is also coming down quite significantly. The cost of shipping goods from China to the US for example, used to cost ~$10,000 per container. Now, this costs below $2,000.

From a global perspective, a segment that further emphasises resilience is luxury goods. Despite high inflation and rising costs of living, as well as ongoing COVID-19 restrictions, ~95% of luxury brands reported positive growth in 2022.

China's reopening was also a meaningful tailwind for the luxury sector as Chinese consumers account for over 30% of purchases. We anticipate that sales of luxury goods should increase this year depending on the strength of China’s recovery and the ability of the US and Europe to withstand economic headwinds.

Ultimately, high-income spenders will likely continue to spend in times of economic turbulence. And with brands already adept at navigating through turbulence — be it lockdowns or the latest trends — they should be able to weather the rocky road ahead.

We can expect to see some level of normalization. Consumers this year will become more selective when it comes to discretionary spending. That means companies should start to diverge again. So in this environment, the companies with lasting pricing power and margin upside are better positioned. Therefore, by the end of the year, we could see the top line to be more moderate, and more normalized, but margins to be better.

Prerna Bhalla, Investment Analyst