Diamonds & the Global Economy

The global economy has not had a bumper year. The extent to which growth in emerging markets can compensate for weaknesses in mature ones has diminished with each crisis. The Euro-zone catastrophe has spread across European borders, along with resulting concerns about its global impact. Similarly, trends in the U.S. have done little to spur confidence.

In short, the world is a more pessimistic place than it was in January. The bad news continues as it doesn’t seem to be getting any better.

In an aptly named fourth-quarter global economic outlook report recently published by Deloitte titled ‘Stressful Times,’ researchers note that while the big issues facing the global economy have not changed since July, namely the Eurozone crisis and uncertainty about the path of U.S. monetary and fiscal policy, crises have continued to surface.

Deloitte warned that the U.S. is teetering on another recession as job growth fails to materialize, government spending remains high and the last round of quantitative easing did little to stimulate growth. This week, the U.S. Department of Commerce reported that the U.S. economy grew by 2 percent in the third quarter, slower than the initial estimate of 2.5 percent. Similarly, output in the Eurozone continues to slump as the debt crisis just won’t go away, and, in fact, spreads.

These results have impacted growth projections in important emerging economies such as China. The World Bank revised its forecast for the Chinese economy predicting growth of 9.3 percent this year and 8.7 percent in 2012. “Growth is still strong in developing East Asia, but continues to moderate mainly due to weakening external demand, underscoring the need for governments to refocus on reforms to increase domestic demand and productivity,” the bank stressed in a report on the region.

Increasingly, China is expected to strengthen its own domestic consumption to compensate for a slowdown in exports to the U.S. and Europe. In a visit to the U.S. this week, Chinese Vice Premier Wang Qishan suggested that maintaining strong Chinese economic growth is more important than reducing the swelling trade deficit between the two countries.

“Global economic conditions remain grim and ensuring economic recovery is the overriding priority,” Reuters quoted him as saying. “An unbalanced recovery would be better than a balanced recession.” China may well become a more insular, self-sustained economy in the coming years.

Whether this may result in more diamonds being manufactured by China for China requires greater research and discussion. Certainly one can expect the country’s diamond manufacturing industry to grow and leading centers such as India should take note.

More relevant now is the impact that a global economic slowdown may have on the diamond industry, particularly at the start of the Christmas shopping period. By most measures, growth in the trade outpaced that of other sectors and the general economy in 2011, driven by the strong trading in the first half of the year and despite weak consumer confidence.

Jack Ablin, chief investment officer at Harris Private Bank, argues that contrary to historic trends, consumer spending is no longer taking its lead from confidence in the market, or lack thereof. He suggests that this may be due to fewer households accounting for the bulk of retail sales in the U.S.

As this column contended in last week’s editorial titled ‘Mood More Than Money,’ market sentiment is very much an influencing factor in the diamond trade, even more so than before. Furthermore, the industry is in fact enjoying a period of rising consumer numbers as new customers with a growing penchant for bling emerge in markets like China and India.

However, in the current economic environment, the fact is that in the diamond market a lower volume of goods is being traded for higher values. For example, while Hong Kong’s polished diamond imports by value rose 33 percent year on year to $13.32 billion in the first nine months of 2011, by volume they fell 2 percent to 20.962 million carats. The average price of these goods was up 36 percent from a year earlier.

Similar trends are evident at other trading centers to varying degrees, as they are in the jewelry retail sector. Growth is being stimulated by higher prices, not only as fewer goods are being turned over, but significantly as consumers opt for smaller, or lower quality, less expensive items.

These developments are forecasted to continue between Thanksgiving and Christmas as U.S. consumers are expected to tighten their belts although continue to spend. The expected push by retailers for promotions and discounted items may even result in a better-than-expected holiday season for the trade. The trend to compromise on quality is also anticipated in the East ahead of the Chinese New Year on January 23 as consumers there assess the full extent that a sluggish global economy will have on their spending habits.

Diamond dealers and manufacturers should take note. The composition of their inventories has already changed character. And while they gain confidence from what they expect to be a positive season — even predicting strong growth in 2012, as many in the trade have — the global economic outlook still puts a damper on business. If global economic growth is set to slow in 2012, it will impact demand, prices and, most importantly, sentiment in the diamond industry throughout the year, as it did in the latter half of 2011. The new economic environment makes for stressful, but interesting, times indeed.

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