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If consumers around the world think that 2024 will be a chance to catch their breath after a period of post-pandemic turmoil, they may be mistaken. Globally, slowing growth, continued renewed geopolitical conflicts, and pressures on consumer spending will likely define the economic outlook. And, as in the past, market reactions have been diverse and the impacts will not be felt uniformly.
As 2023 draws to a close, forecasters are recalibrating their outlooks as the burden of high inflation and associated rising interest rates shows little sign of approaching target levels. By October, the International Monetary Fund (IMF) projected global GDP growth of 2.9% in 2024, down from 3% in 2023 and 3.5% in 2022. The IMF cited a slowdown in developed economies as the main cause.
Still-high inflation will remain a focus of attention: Global headline inflation is expected to fall to 5.8% in 2024, down from 6.9% in 2023 and 8.7% in 2022, according to the IMF. That has led Federal Reserve officials to say they expect interest rates to remain “higher for longer” at the central bank.
What makes 2024 different from past years is that consumers in each of the major economies may be facing different challenges, creating additional complexity for fashion executives navigating their companies through regional headwinds. In Europe, the economic picture is bleak as the country continues to suffer under the shadow of the Ukraine war. By the second quarter of 2023, growth had stalled in Germany, Europe’s largest economy, with the risk of a second recession within a year still looming. Meanwhile, growth slowed in the UK, Europe’s second-largest economy, as the economy tried to fend off a 2022 inflation spike and adjust to 14 consecutive interest rate hikes.
According to the IMF, euro area GDP growth is expected to remain low, rising only slightly from 0.7% in 2023 to 1.2% in 2024. The European Commission’s monthly survey of the euro area showed that consumer confidence hit a six-month low in September. The ongoing cost of living crisis in the euro area, combined with core inflation remaining high compared to the United States, is putting strain on many households.
In the United States, growth prospects look a little brighter than in Europe, with Federal Reserve policies having helped avoid a full recession and inflation appearing to have fallen, but GDP growth next year is expected to slow to 1.5% from 2.1%.
Various events in the second half of 2023 have highlighted the fragility of domestic consumer confidence. For example, in October, US policymakers lifted a three-year freeze on student loan repayments, but a Morgan Stanley survey found that 37% of respondents expected to have to cut spending to repay the loans, and 34% said they would not be able to repay them at all. A central bank survey showed that credit card debt hit a record high of $1.3 trillion at the beginning of the year, and high interest rates and loan fees are also a headwind.
In China, 2023 brought different economic pressures. The economy is in deflation and the real estate market, which drives 25% of China’s economy, is in an ongoing crisis, with apartment sales in August 47% below 2019 levels. Major real estate companies are struggling under the weight of unsustainable debt and losses. Youth unemployment is high, reaching 20.8% in May (the latest day for which the National Bureau of Statistics of China released new figures).
Chinese consumers continue to accumulate savings, but are slow to return them to consumption. China’s total savings rate is historically high at around 35-45% of GDP, and according to the World Bank, the country has the highest savings-to-GDP ratio of any large economy. Indicators suggest that China’s savings levels will rise further in 2023, likely as households expand their safety nets as a precautionary measure.
In contrast, savings balances are declining in both the United States and Europe. Although unusually large excess savings accumulated in these regions during the COVID-19 pandemic, the analysis shows that savings are likely to run out by the end of 2023 as consumers resume shopping more freely after the pandemic lockdowns are lifted. The tough economic conditions in 2023 are also making it difficult for consumers to replenish their savings, which, although remaining fairly high in absolute terms, are being devalued by inflation. This bodes poorly for discretionary spending in 2024 after the relatively strong consumption of recent years. Pressures on household finances are likely to encourage a decline in discretionary spending. According to a McKinsey study, net purchase intentions for clothing in the third quarter of 2023 were minus 25 in the United States and minus 29 in Europe.
Rays of light
Still, there are some country-level reasons for some optimism. The IMF forecasts China to see weaker demand and a base case for GDP growth slowing to 4.2% from 5% in 2023. Imports are expected to grow 1% year-on-year in the first half of 2023 (down 6.4% in the same period in 2022), suggesting a temporary uptick in domestic demand.
According to McKinsey, Chinese consumers are slightly more optimistic about their spending plans than their U.S. and European counterparts, with a net intention to buy clothing and jewelry of 7% and shoes of 8%. Meanwhile, 69% of consumers plan to splurge on shopping. However, despite caution, optimism for China should be tempered, as the overall outlook could be disappointing. Shopping and travel forecasts have been sluggish in recent months, and growth rates remain well below historical levels.
Emerging Asia also offers potential. In India, for example, consumer confidence hit a four-year high in September 2023, India-based executives are more optimistic than their Western counterparts, with 85% of respondents to a McKinsey global survey saying conditions had improved in the six months to August. India’s benchmark manufacturing Purchasing Managers’ Index (PMI) hit a 31-month high in May, while the services PMI hit a 13-year high in July. GDP growth was 6.9% in FY23. Strong investment activity, stable domestic demand, and policymakers’ push for infrastructure spending supported the rapid growth. This growth rate may moderate in 2024, but GDP growth remains robust, with a forecast of 6.3%.
The impact of the mixed outlook for 2024 will be felt across fashion businesses throughout the value chain. Brands and retailers are likely to face further weakness in consumer demand in some key markets, while suppliers may feel the impact more keenly as this decline in demand ripples through the supply chain and leads to underutilized capacity. Revenue growth in this environment is likely to be driven by price rather than volume, meaning companies will need to plan price increases carefully and precisely to avoid alienating cash-strapped consumers.
To increase resilience across the value chain in 2024, fashion industry decision makers can place emphasis on contingency planning to ensure scenarios factor in high levels of uncertainty and a range of regional consumer demand shifts. Each regional scenario will need to take into account increasingly diverse underlying factors. Meanwhile, strong inventory management will remain a priority, likely continuing the success of cost control programs implemented post-pandemic.
Meanwhile, suppliers can expect an increasingly competitive environment. Price wars may emerge in the manufacturing sector as weak consumer demand puts pressure on orders and creates overcapacity in some supply chains. Suppliers may need to work more closely with brands to reduce their exposure to price wars and strive to keep costs under tight control in the year ahead.
This article first appeared in “The State of Fashion 2024,” an in-depth report on the global fashion industry, jointly published by BoF and McKinsey & Company.
