Donald Trump’s trade war has shattered expectations for a US-driven recovery in the luxury market this year, as tariffs threaten to prolong a slump in demand for handbags and high-end watches.
The US and China, the twin engines powering global demand for luxury goods, have continued to ratchet up tit-for-tat import duties on one another’s products in a febrile trade dispute that risks severely undermining consumer confidence in the world’s two largest economies.
Analysts have responded by slashing growth forecasts across the industry. Bernstein this week forecast that the luxury sector would suffer a 2 per cent decline in revenues in 2025, reversing its previous prediction of 5 per cent growth because of heightened economic uncertainty and the increased likelihood of a global recession.
“Our base case now is any pick-up in luxury is pushed into 2026,” said one industry banker.
The apparent granting this weekend of a reprieve for technology groups from heightened US tariffs on China, only for the administration to signal on Sunday that consumer electronics will fall under a separate regime of duties instead, highlights the difficulties predicting the hit for any sector.
But while Trump could yet change course on his tariff plans, the banker said, “a lot of the damage is already done”.
LVMH, whose billionaire boss Bernard Arnault flew to Washington at the end of March to discuss potential tariffs with Trump, a long-standing acquaintance, kicks off luxury earnings season on Monday.
Arnault in January attended Trump’s inauguration and subsequently hailed “a wind of optimism” sweeping through the US. The luxury tycoon said at the time he was considering increasing LVMH’s US production.
Barclays expects organic sales in LVMH’s core fashion and leather goods division — a bellwether for the industry — to decline by 1 per cent in the first quarter. Group sales are expected to be flat against the same period last year.
Bernstein analyst Luca Solca stuck by his reduced estimates for the sector as a whole in 2025, even after Trump on Wednesday announced a 90-day pause on his “reciprocal tariffs” for countries that showed willingness to renegotiate trade agreements with the US.
“Going back to the previous numbers, as if what happened was just a bad dream, is out of the question. We have material damage in the financial markets and in the economy as a consequence of erratic policy announcements,” Solca said.
“Uncertainty reigns supreme, which is normally an excellent background for a recession,” he added.
After a historic boom during the pandemic, when consumers splurged on high-end handbags and alcohol, luxury has been stuck in a downturn as middle class shoppers rein in spending and China’s economy falters. That is now being compounded by Trump’s trade war.
Trump has singled out China, a key market for the luxury sector, for punishment. US tariffs on Chinese goods now stand at 145 per cent. China, in response, has raised tariffs on US imports to 125 per cent.
Most luxury goods are made in France and Italy, while high-end watches are made in Switzerland. The US is subjecting all three countries to a 10 per cent tariff, after walking back the higher rates it initially imposed.
Trump’s tinkering has created chaos on the ground. One executive said his company had been forced to change duty rates on shipments headed to the US three times in less than a week.
“Loss of confidence is long-lasting . . . and uncertainty is absolute poison for consumer sentiment,” he added.
The tariffs themselves, as they stand today, are still more manageable for luxury companies than many others, and stronger brands have more leeway to mitigate the impact through price increases. But in an industry reliant on consumer confidence, the deeper damage is psychological.
The brutal sell-off in global stock markets this year will leave many luxury shoppers nursing their wounds. “If you watch what happens with the stock market, you can [basically] predict the level of business in our boutiques,” Bruno Pavlovsky, president of fashion at Chanel, told the Financial Times last month.
Erwan Rambourg, managing director at HSBC, wrote that the risks to luxury lie in a combination of wealth destruction, constrained consumer spending power in the US and broad deterioration in consumer sentiment.
“We are expecting, quite literally, fewer champagne bottles to be popped this year,” he wrote.
HSBC now expects organic sales to be flat in 2025, in contrast to its previous expectation that sales would grow 5 per cent compared with 2024.
The bank’s analysts had upgraded most luxury stocks towards the end of last year in the belief they would benefit from a US-driven upturn in luxury spending. “That won’t be the case in our view any more,” they wrote.
Expectations for “slight growth” in mainland China, after a painful 2024, are also looking increasingly unlikely.
However, Hermès, the group behind highly sought after Birkin bags, is expected to continue outperforming. Analysts at Barclays estimate its sales will grow by 8 per cent in the first quarter.
But problems at Gucci, Kering’s biggest brand, have left the group heavily exposed to any downturn. Barclays expects Gucci sales to be down 25 per cent in the first quarter while Bernstein warns that Kering is now “highly unlikely” to meet its guidance for flat revenues and operating profit in 2025.
Additional reporting by Lauren Indvik in London and Alex Rogers in Washington
