Women’s Wear Daily
04.16.2014
business-features
business-features

Number 2: It's the Economy, Still

The industry has hopes for the future, but nowhere to turn for stability.

By
with contributions from Samantha Conti, Amanda Kaiser, Kathleen E. McLaughlin, Alex Wynne
business-features/news
Euro

The Euro.

Photo By Courtesy Photo

Fashion is still looking for a port in the storm.

It’s been five years since the last U.S. recession began, but boom never followed bust as the financial crisis, a debt hangover and a housing glut interrupted the typical cycle and threw the global economy off kilter.

That’s left the industry with hopes for the future, but nowhere to turn for stability as the U.S. recovery limps along, Europe remains tangled in a debt crisis and the economic engine of China is shifting into a lower gear.

The U.S. recovery is still weak and, although consumer confidence is up and company profits are topping last year’s take, unemployment is still high at 7.7 percent and sales growth this holiday season is projected to slow significantly. Retailers wanting to make more money find themselves looking within for ways to operate more efficiently and take advantage of the few growth areas, such as e-commerce.

As a barometer for the economy, look at Ben S. Bernanke, chairman of the Federal Reserve. The leader of the Fed has famously been described as the person who takes away the punch just as the party gets started — raising interest rates to restrain growth and keeping the economy from overheating.

Instead, the economy has been so weak that Bernanke, a scholar of the Great Depression, has the Fed pouring the drinks fast and furious, promising to keep interest rates low for an extended period and turning to bond purchases to keep mortgages relatively cheap and support the housing market.

 

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Now, all eyes are on Washington, where President Obama is wrestling with Congress as the two try to steer away from the fiscal cliff — an automatic slate of tax increases and spending cuts that kicks in at the end of the year. Skeptics remain, well, skeptical since the fiscal cliff was a way for lawmakers to kick the can down the road when the debt ceiling needed to be raised last year.

If Washington can’t come to some solution, economists expect America to sink back into recession.

The fiscal cliff is just the U.S. version of the ills vexing Europe, where governments are collectively and individually trying to find the right balance of taxes coming in and social spending going out. The awkward dance among politicians has stronger players like Germany wondering how much they should support weaker neighbors such as Greece and has threatened to break apart the euro currency bloc.

The problems aren’t likely to be fixed anytime soon.

German Chancellor Angela Merkel recently said the sovereign debt crisis in the region would last “at least” five more years. “Whoever thinks this can be fixed in one or two years is wrong,” she said.

According to Eurostat, the euro zone has slipped into its second recession since the global financial crisis began. Economic output in the 17-country currency bloc fell 0.1 percent in the third quarter, following a 0.2 percent drop in the second quarter.

Italy and Spain have been contracting for a year already, and Greece is in the maw of a depression. Germany and France, the euro zone’s biggest economies, grew 0.2 percent in the most-recent quarter.

The French economy is growing — albeit at a snail’s pace —  and Moody’s Investors Service last month downgraded the country’s credit rating to “Aa1” from “Aaa,” and retained its negative outlook on the nation due to rising unemployment, tax increases and grim prospects of economic growth.

Weakness in the massive consumer economies of the U.S. and Europe has been a blow to China, which has seen its manufacturing-based growth slow.

Gone are the double-digit spikes of years past. China’s economy expanded by roughly 7.5 percent for the first three quarters of the year.

But even that growth — and the continued vibrancy of the Chinese luxury consumer — was unable to mask the slowdown in production. Investors worried over a lack of capital for private firms as well as a potentially growing reliance on larger state-owned enterprises, which are not known for innovation in a complex global economic environment.

Japan has been little comfort. The country got off to a strong start this year as the government funded recovery efforts from last year’s earthquake and tsunami, but the economy lost momentum as the year progressed, tensions with China flared and consumers cut back on their shopping. Most recently, gross domestic product slumped 3.5 percent on an annualized basis in the third quarter.

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