The diamond market is being greatly influenced by economic sentiment. A far cry from the supply-driven market that it once was, today, short-term diamond trading is largely driven by macroeconomic factors.
It is little wonder then that the market has been jittery in 2013 as such is the state of the global economy. To better navigate this environment, it is worthwhile to understand recent economic developments as they may affect the future of the trade in its respective markets.
Perhaps the most significant economic story of 2013 has been the shift back toward developed countries and away from emerging markets. A number of recent reports point to reduced risk in advanced economies and slower growth in developing ones.
Last week, the International Monetary Fund (IMF) lowered its forecast for global growth to 3.1 percent from its previous projection of 3.3 percent made in April, noting that global growth prospects are still dominated by negative factors.
“While old risks remain, new risks have emerged, including the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the United States leads to sustained capital flow reversals,” the IMF wrote in its July 9 report.
Indeed, the stimulus-driven U.S. economy has helped boost global sentiment when other markets have been restrained, and it is uncertain what impact a tapering off of that stimulus will have on the economy.
The biggest question in the U.S. has been whether the Federal Reserve will stop injecting money into the economy. Through its quantitative easing program, the Fed has bought about $85 billion in bonds each month and kept near-zero interest rates in an effort to reduce borrowing costs and prop up the economy. This week, chairman Ben Bernanke said that the Fed could start to moderately scale back its purchases later this year if unemployment continues to fall and inflation stays low. Simultaneously, he signaled plans to keep low interest rates for the time being.
There are signs of an improving economy. The U.S. unemployment rate was unchanged at 7.6 percent in June, with 195,000 jobs added during the month, which was better than expected. Also encouraging, inflation rose 1.8 percent year-on-year in June, closer to the Fed’s 2 percent target.
Other indicators have been mixed. Government data showed that retail sales grew a softer-than-expected 0.4 percent in June with consumer spending also missing forecasts in the second quarter. Analysts subsequently lowered their expectations for second quarter gross domestic product (GDP) growth to well below 1 percent in advance of the government’s first estimate to be published on July 31.
Encouragingly, jewelry sales seemingly outperformed other sectors in the second quarter with jewelry store sales up 10.5 percent year-on-year to $12.66 billion in the period January through May 2013. The diamond and jewelry industry continues to benefit from a wealth effect in the U.S. Low interest rates have created excess money that is being moved to the stock market with the Dow Jones Industrial Average touching new highs again this week. The strong dollar has also boosted the U.S. diamond and jewelry industry’s position relative to other centers.
Whether this can be maintained in the long term once interest rates rise, and if the dollar should weaken, remains to be seen.
As a large importer of diamonds, Japan’s so-called Abenomics – named after Prime Minister Shinzo Abe’s economic policy – has mixed implications for the trade. Like the Fed, the Bank of Japan has sought to boost economic activity by pumping an unprecedented amount of money into the economy through increased purchases of government bonds and other assets.
Representatives from the Bank of Japan this week gave an upbeat assessment of conditions noting that the economy was starting to recover moderately. June saw a “pick-up” in exports and “resilience” in consumer spending, the bank said. Investor sentiment is also up and the Nikkei 225 has been the best performing stock index in 2013.
As a means to stimulate exports, Japan’s new government, elected this past December, has also been intent on depreciating its currency. The yen is down 15 percent from January and continues to hover around the JPY 100 to $1 barrier.
A weaker yen is not great news for the local diamond and jewelry trade. As a net importer of polished diamonds, and the world’s third largest diamond jewelry consumer market, companies operating there are facing higher costs for their imported goods. The weak currency has also impacted revenue for jewelry retailers who already have a strong presence there, such as Tiffany & Co. and Harry Winston.
However, Japan’s resurgence after a decades-long recession is a welcome and almost unexpected relief for the global diamond and jewelry market, especially given the Japanese consumer’s penchant for luxury products.
The IMF accordingly raised its 2013 growth forecast for Japan to 2 percent to reflect the effect that recent policies will have on confidence and private demand. Its more moderate 1.5 percent growth expectation for 2014 reflects the weaker global environment, the IMF stated.
Now, the downside
Much of that weakness stems from softness in the Euro-zone, which is still struggling to recover from its long running sovereign debt crisis. Exports from the 17 countries that share the euro slumped 2.3 percent in May, while imports fell 2.2 percent. The region’s economy is widely expected to contract for the seventh straight quarter when initial second quarter GDP data is released in mid-August.
The European Central Bank (ECB) has pledged to keep interest rates low, but economists want to see a restructuring and recapitalization of the banking sector as a necessary step to revive the economy.
Meanwhile, at press time, protestors in Greece were rallying against a scheduled vote for further austerity measures and public sector job cuts. Frustrated German tax payers will likely be asked to fund another Greece bailout, and possibly one for Portugal too.
Some feel that prospects for Germany’s economic growth have also softened on fears over falling exports to China. “The stuttering and now slowing Chinese economy is a clear cause of concern [and] could become a new risk factor for the German economic outlook,” Carsten Brzeski, a senior economist at ING DiBa bank, wrote on his blog.
Such sentiment reflects China’s growing influence and changing economy. The new leadership, which came to power earlier this year, is tasked with rebalancing the economy away from investment and exports toward being a more consumer-driven economy. Indeed, retail sales grew 13 percent in the first half of the year. Worryingly, disposable income growth for China’s urban households slipped to 6.5 percent over the first half of this year compared to 9.7 percent growth in the first half of 2012.
The overall second quarter GDP reading released late last week wasn’t bullish either, falling short of forecasts. China’s economy grew 7.5 percent during the quarter, down from 7.7 percent in the previous three months. Analysts noted the impact that the country’s slowdown may have on the global recovery.
Still, jewelry sales have been upbeat. Chow Tai Fook, the Hong Kong-based jeweler operating across China, Hong Kong and Macau, reported that its revenue grew an impressive 63 percent in the June quarter. Sales rose as consumers rushed to buy gold products when gold prices plunged in April. That prompted the company to reverse its previous caution to a brighter outlook in the Chinese jewelry retail space.
However, wholesale and retail inventory levels will likely remain low, and diamond buying subsequently restrained during the current transition period and as the pace of China’s economic growth continues to slow.
While the slump in gold prices has helped spur activity among China’s consumers, India is trying to curb its gold consumption and consequently reduce its unruly current account deficit. The government has raised gold import duties to 8 percent and the Reserve Bank of India has limited the providing of loans against gold jewelry and coins weighing over 50 grams.
To make matters worse, the rupee has depreciated by about 10 percent against the dollar in the past three months, further impacting consumer sentiment, among other things. While the weak currency should help exporters, such as large diamond manufacturers, domestic demand has declined in light of the tough economic environment there. High inflation has served to raise the gap between the rich and poor and economic growth has slipped to 5 percent in fiscal 2012-13, its lowest level in a decade.
India’s large diamond and jewelry sector is therefore being battered from all sides. Jewelry shares have plummeted – largely due to the gold story, and diamond manufacturing facilities are operating at reduced capacity with reports that around 25,000 cutters have lost their jobs in recent months. There is also a sense that the government is not that interested in the sector.
The global diamond industry
India matters because it is the largest diamond manufacturing and trading center, working to supply both overseas and its own sizable jewelry consumer market. Its weakness in 2013 is symptomatic of caution exerted in both international and domestic markets.
Indeed, the global economic landscape makes for some conflicting analysis. VTB Capital called the recovery uneven and multi-speed. Likewise, the diamond industry’s navigation of it remains uneven.
It is true, the fundamentals for long-term growth remain in place and China represents the strongest growth opportunity for the industry. But for an industry increasingly sensitive to sentiment, that long-term growth will likely be defined by spouts of short-term volatility. While the U.S. and Japan continue to support the market in the short term, weakened prospects in China and India should be reason for concern. Certainly, it is reason enough for the diamond and jewelry trade to tread carefully in the second half of 2013.