Dr Pippa Malmgren is the politics and policy expert. She used to be Special Assistant to the President of the United States for Economic Policy on the National Economic Council and was named Global Leader for Tomorrow by the World Economic Forum in 2000. Luxurytopping had the privilege of interviewing Pippa in the private members club Grace Belgravia.
There have been several comments about the American economy being built on sand, to what extent do you think this is the case?
I am told by everyone that I speak to in all these different fields that I am the most optimistic economist at the moment. I am very upbeat about the US and the UK especially, I’m not so positive about emerging markets but even they will be ok.
Is America importing too much?
Manufacturers are moving a back to the US so fast and now so are other activities. Mining has shifted back to the US, energy production is at the epicentre of the US, agriculture too. I see huge signs of innovation. I don’t mean technology. I mean people are reinventing themselves. Companies are reinventing their businesses. New industries are coming to life such as crowd source finance which is fast replacing the traditional bank lending system. By the way, the US only depends for less than 10% of its GDP for exporting and importing. It’s not like most countries which are a lot more dependent on imports/exports.
Let’s look at what is happening in the emerging markets, what is going to be the impact of this on Luxury Spending?
We have to be very careful in assuming that China is going to be the biggest engine of growth because I actually don’t think that it will be. This is a really controversial point, so I want to spend a little time explaining what is happening in China and the emerging markets generally and why it is not proving to be the answer that the luxury goods industry had assumed. It has to do with the rise and inflation in the world economy. I think it is very clear that we have inflation in the emerging markets. Food and energy prices are up. In the last six months alone we have had a record all-time high for the price of beef, pork and shrimp. These are the core proteins that emerging market workers depend upon. But not only that, the staple food stuffs are also rising. Some seemingly obscure but very relevant examples are the price of onions in India. Recently the Indian cabinet held an emergency meeting to discuss the price of onions. The price is up 163% in a single year but in certain parts of the country it has trebled in recent months. Onion prices have been known to bring governments down in India. In Brazil tomatoes are the driver of social protests. In China its pork and in Egypt its wheat. So we can see that different places have different vulnerabilities and we don’t tend to give enough credit to the fact that individual food prices can make an enormous difference. An emerging market worker spends 40-70 % of his income on food and energy alone. Because of these price hikes the workers are asking for wage increases. The wage demands in China are running at 70% per annum for skilled workers. This means that they have priced themselves out of competitiveness. This is why Apple is moving its production line back to the US and why Brooks Brothers has moved its clothing production back to the US, Tiffany’s is also manufacturing in Kentucky again. This is a really significant shift and I would go further and say its no longer only manufacturing. Its mining, agriculture and energy production that are all shifting back to North America as well. This means that the business model in China has broken. This is not just a temporary phenomenon, this is a very profound question. How will they generate income going forward if they are no longer the cheapest producer? The dockyards in Liverpool are unable to hire fast enough because they are winning so much ship repair business back from China and South Korea and there aren’t enough skilled workers. This is a big shift and I have argued that the luxury goods companies are going to find that their sales to the US are going to exceed their expectations and their sales to China are going to underwhelm as a result. The corporate results we are seeing are reflecting that already.
The Chinese are building 10 new cities and people in China are moving West again. This is going to cause the figures in the luxury goods companies to go down.
China needs to build all these urban areas in China is because they are losing the export model . They hope to replace it with a domestic demand led business model. The question is can they build it fast enough in order to keep the population placated. The social protests in China are already pretty severe and the question is, can the population wait for 5, 6 or 7 years for this new domestic demand economy to come to life? I think the answer is no, and so they are going to have a hard time managing their population.
If I am a Luxury Brand, where do I start getting my revenue from, it has dropped in China, it’s a little dodgy in the Middle East. Do I go to Russia? What do I do? Where do we go?
Yes. Your question is so interesting because I get the same question from people in the financial markets. I think we are no longer in this binary world where you pick a geographical location. You have to believe that there will always be a group of wealthy people that have an interest in spending their money on these kinds of things, but they will no longer be just in one place. It will be a new generation of people who are profiting from the incredible innovation that’s happening in the world economy. Young people all have this notion that they should go to China, but if you look at the world economy today, where do you see the most “on fire” booming economy in the world? The answer is Texas. If I were 18 now I would go to Texas, Texas is booming! Don’t pick a geographical location, pick innovation.
What is the effect of the crisis in the emerging markets on London?
In London alone the price of properties that Luxury Brands sell from is exploding and it will continue to because inflation in emerging markets. Everybody in emerging markets understands this: if I see inflation then I need a safe haven, I need to get out of here because social unrest follows inflation. The two most reliable ‘rule of law’ locations that they can choose from are the US and the UK. And it’s a lot easier in the UK- the UK has become the new tax haven! Property is now attracting pension funds and big institutional investors. The UK benefits from the Queen and the trusted Courts, both of which imply stability. This is why emerging market investors are flocking to the UK and buying assets here. This is going to lift the price of the properties they are operating from and the assets they are selling are on upward price pressure. Diamonds prices are rocketing upwards and are the prices for leather, fabrics and textiles too. After all, these are hard assets too. Investors can move large sums of value across borders in the form of diamonds without setting off a metal detector. So costs and prices are both rising for most luxury goods.