Omicron’s Threat to Global Economy Increasingly Runs Through China
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Omicron’s Threat to Global Economy Increasingly Runs Through China

U.S. and Europe are learning to live with the virus, but Beijing’s zero-Covid strategy could hit supply chains.

By Paul Hannon
Mon, Feb 21, 2022 2:35pmGrey Clock 3 min

The direct economic harm caused by the Omicron variant of Covid-19 in highly vaccinated countries appears so far to be relatively modest and short-lived, but its indirect hit could prove significant if China resorts to repeated lockdowns in its effort to suppress the virus within its borders.

Omicron led to a fresh surge in infections wherever it gained a foothold, a rise in deaths, and disruptions for businesses as infected workers sought medical treatment or quarantined.

But it has also become clear that Omicron causes milder symptoms in vaccinated people than its predecessors, and an increasing number of European countries have lifted restrictions put in place when the variant emerged. U.S. job growth accelerated in January, even though the number of people not working because of illness more than doubled from December.

So while business surveys and other data indicate economic growth slowed in Europe and the U.S. as 2022 began, many economists expect the Omicron variant to do less damage than previous surges.

The lifting or absence of restrictions in Europe and the U.S. signals a greater willingness to live with the virus, while remaining alert to its dangers. That is not yet an option where populations have received vaccines that offer very limited protection against Omicron, as is the case in China.

That is part of the reason why China continues to pursue a “zero-Covid” strategy, which requires strict lockdowns when local outbreaks occur.

China is the world’s leading supplier of the parts other manufacturers use to make the products households buy, which are known by economists as intermediate goods. Should it have to lock down significant parts of its economy, the impact would likely be felt in lower growth and higher inflation in Western economies.

“Lockdown risks therefore continue to rise in China, even as they decline elsewhere,” said Frédérique Carrier, head of investment strategy at RBC Wealth Management. “Increased pandemic restrictions could lead to additional supply-chain disruptions, hold back the normalization of the global economy, and fuel global inflation, while capping Chinese economic growth.”

The International Monetary Fund’s economists estimate that supply-chain problems knocked between one half and one full percentage point off global economic growth in 2021, while pushing inflation higher. In other words, the global economy would have grown by as much as 6.9% last year, compared with the 5.9% expansion it actually recorded, if there had been no supply problems.

There are some signs that supply-chain problems are easing. A new supply- blockages measure developed by economists at the Federal Reserve Bank of New York showed a record level of strain in November, but a decline in December and January, which they said “seems to suggest that global supply chain pressures, while still historically high, have peaked and might start to moderate somewhat going forward.”

A prolonged series of new lockdowns in China, however, could reverse that progress and be a significant drag on growth this year.

“China’s zero-Covid strategy could exacerbate global supply disruptions,” said Gita Gopinath, the IMF’s first deputy managing director.

According to the World Trade Organization, Chinese businesses sold $354 billion of intermediate goods to overseas buyers in the three months through June 2021, way more than the next largest exporter, which was the U.S. with $200 billion. The U.S. is the largest market for Chinese exports of intermediate goods, but South Korea, Japan, Germany and India also account for a significant share.

China would likely face a surge in deaths if it were to abandon the zero-Covid strategy now. About 86% of China’s population has been fully vaccinated, but the vaccines most widely used, developed by Sinopharm and Sinovac, use inactivated virus. Those are widely believed to be less effective against Omicron infections than the mRNA vaccines developed by Moderna Inc. and by Pfizer Inc. with BioNTech SE.

China is accelerating its efforts to produce domestic mRNA vaccines and medicines for Covid-19, said an official familiar with the matter. If it were to be successful, the need for lockdowns would become less pressing. But few expect a shift away from zero-Covid to happen soon.

“We really depend on China succeeding in this transition,” said Jörg Wuttke, president of the European Union Chamber of Commerce in China and chief representative of German chemical company BASF SE in the country. “But frankly, it doesn’t look good.”

Assessing the scale of the threat to global supply chains is difficult, given uncertainties about how rapidly Omicron can spread in an environment where restrictions are as tight as they are in China.

Two factors could lessen the impact of a more-rapid spread than has so far occurred. First, economists see the willingness to live with the virus in the U.S. and Europe as opening the way for a greater shift back to spending on services and away from spending on goods this year. That would ease some of the demand pressures on supply chains.

It is also possible that Chinese authorities could manage the zero-Covid policy to support exports, given the drag on growth from problems in the country’s property market and weak consumer spending at home.

“We believe the government will make efforts to minimize the supply disruptions, including some loosening/improvement in the zero-Covid policy implementation,” economists at Barclays Bank wrote in a note to clients.



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Why Prices of the World’s Most Expensive Handbags Keep Rising

Designers are charging more for their most recognisable bags to maintain the appearance of exclusivity as the industry balloons

By CAROL RYAN
Tue, Mar 5, 2024 3 min

The price of a basic Hermès Birkin handbag has jumped $1,000. This first-world problem for fashionistas is a sign that luxury brands are playing harder to get with their most sought-after products.

Hermès recently raised the cost of a basic Birkin 25-centimeter handbag in its U.S. stores by 10% to $11,400 before sales tax, according to data from luxury handbag forum PurseBop. Rarer Birkins made with exotic skins such as crocodile have jumped more than 20%. The Paris brand says it only increases prices to offset higher manufacturing costs, but this year’s increase is its largest in at least a decade.

The brand may feel under pressure to defend its reputation as the maker of the world’s most expensive handbags. The “Birkin premium”—the price difference between the Hermès bag and its closest competitor , the Chanel Classic Flap in medium—shrank from 70% in 2019 to 2% last year, according to PurseBop founder Monika Arora. Privately owned Chanel has jacked up the price of its most popular handbag by 75% since before the pandemic.

Eye-watering price increases on luxury brands’ benchmark products are a wider trend. Prada ’s Galleria bag will set shoppers back a cool $4,600—85% more than in 2019, according to the Wayback Machine internet archive. Christian Dior ’s Lady Dior bag and the Louis Vuitton Neverfull are both 45% more expensive, PurseBop data show.

With the U.S. consumer-price index up a fifth since 2019, luxury brands do need to offset higher wage and materials costs. But the inflation-beating increases are also a way to manage the challenge presented by their own success: how to maintain an aura of exclusivity at the same time as strong sales.

Luxury brands have grown enormously in recent years, helped by the Covid-19 lockdowns, when consumers had fewer outlets for spending. LVMH ’s fashion and leather goods division alone has almost doubled in size since 2019, with €42.2 billion in sales last year, equivalent to $45.8 billion at current exchange rates. Gucci, Chanel and Hermès all make more than $10 billion in sales a year. One way to avoid overexposure is to sell fewer items at much higher prices.

Many aspirational shoppers can no longer afford the handbags, but luxury brands can’t risk alienating them altogether. This may explain why labels such as Hermès and Prada have launched makeup lines and Gucci’s owner Kering is pushing deeper into eyewear. These cheaper categories can be a kind of consolation prize. They can also be sold in the tens of millions without saturating the market.

“Cosmetics are invisible—unless you catch someone applying lipstick and see the logo, you can’t tell the brand,” says Luca Solca, luxury analyst at Bernstein.

Most of the luxury industry’s growth in 2024 will come from price increases. Sales are expected to rise by 7% this year, according to Bernstein estimates, even as brands only sell 1% to 2% more stuff.

Limiting volume growth this way only works if a brand is so popular that shoppers won’t balk at climbing prices and defect to another label. Some companies may have pushed prices beyond what consumers think they are worth. Sales of Prada’s handbags rose a meagre 1% in its last quarter and the group’s cheaper sister label Miu Miu is growing faster.

Ramping up prices can invite unflattering comparisons. At more than $2,000, Burberry ’s small Lola bag is around 40% more expensive today than it was a few years ago. Luxury shoppers may decide that tried and tested styles such as Louis Vuitton’s Neverfull bag, which is now a little cheaper than the Burberry bag, are a better buy—especially as Louis Vuitton bags hold their value better in the resale market.

Aggressive price increases can also drive shoppers to secondhand websites. If a barely used Prada Galleria bag in excellent condition can be picked up for $1,500 on luxury resale website The Real Real, it is less appealing to pay three times that amount for the bag brand new.

The strategy won’t help everyone, but for the best luxury brands, stretching the price spectrum can keep the risks of growth in check.

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