Global diamond demand is expected to cool in 2007, based on current economic forecast. Because diamond demand and economic vitality correlate closely, the impending economic slowdown predicted by most forecasters will cause diamond demand growth to slow over the next year, especially in Western Europe, Japan, and North American markets. Asian markets will show mixed results, while diamond demand in India is expected to remain strong. The Middle East, with only miniscule demand by global standards, could be a fertile market for jewelers.  

IDEX Online Research has segmented its 2006 jewelry and diamond industry forecast by major diamond consuming regions of the world. The graph below illustrates the importance of each market by diamond jewelry consumption, economic impact, and population. For example, the graph illustrates that the United States, with just 5 percent of the global population, generates 28 percent of global GDP, and consumers about 51 percent of all global diamond jewelry by value.

 

Source: IDEX Online Research, World Bank, PRB

 

IDEX Online Research’s comments on a market-by-market basis are as follows:

 

United States – Slowing Economy

• U.S. economic growth has slowed to about 2.5 percent in the second half of 2006, below its 3 percent normalized rate. A rapidly-correcting housing market, coupled with production cuts by auto makers, will dampen GDP growth going into 2007.

• The value of the U.S. dollar is expected to remain depressed. This factor, coupled with a softening manufacturing base, will outweigh the boost from an improving trade balance through the first half of 2007. Economic growth will remain below average during this period. Unemployment will edge higher, rising to over 5 percent by the spring of 2007; this level still represents near full employment, however.

• Jewelry sales will slow in the U.S. in 2007, and perhaps into early 2008, due to the “lag effect” of luxury goods demand. However, if there is a rebound in energy prices, cautious consumers could tighten their purse strings, strangling discretionary spending.

Europe – Sluggish Demand

• The second half of 2006 was characterized by more robust economic growth, but these positive trends are not expected to continue into 2007. While employment firmed, a German VAT hike was a damper on consumer demand.

• Waning business and consumer confidence numbers in Europe are perhaps a sign of things to come as global growth slows and inflationary pressures build. While consumer and business confidence are not necessarily a reliable predictor of retail demand, they have an impact on planning. In short, if businesses plan for modest sales increases, that’s what they will get.

• European consumers do not have the same zest for spending that characterizes American consumers, despite their common cultural backgrounds. Weak economic growth, coupled with no population growth and an aging consumer base, will lead to weak jewelry sales in the Euro-Zone for the foreseeable future.

Asia-Pacific – Mixed

• While the economies of most of the Asia-Pacific region, including China, are expected to slow in 2007, both Australia and New Zealand could show modestly accelerating economic growth. A sharper-than-expected economic slowdown in the U.S. economy – which is tied very closely with the fortunes of the Asia-Pacific region – remains a key risk, as does a hard landing for China.

• Regional currency appreciation among Asia-Pacific countries could boost household purchasing power and consumption in 2007. This would allow domestic demand to become an increasingly important driver of economic growth in the region. Further, the interest rate cycle appears to be nearing its peak across most of the Asia Pacific region.

• Jewelry consumption is on the upswing, simply because this is an immature market. It is difficult to say how consumers might react, especially if the economy slows more than expected. However, demand remains relatively strong, a trend we predict will continue, despite possible economic softness.

Japan – Pessimistic Outlook

• Japan’s economic recovery is unfolding more slowly than anticipated. Because of deflationary pricing, GDP in Japan is not expected to show much forward momentum near term.

• The business sector of Japan’s economy continues to be the primary driver of the current economic recovery. Despite low unemployment and interest rates, Japanese consumers remain reluctant to part with their hard-earned yen.

• Jewelry demand in Japan is expected to remain quite soft into 2007. If it appears that inflation is about to return to this economy, consumers might step up their spending in an effort to avoid higher prices. However, it is unlikely that the jewelry industry would be involved in inflationary pricing near term; thus, there is no catalyst to spur jewelry demand on the horizon.

India – Solid Growth

• India is the only major global economy that is expected to post an improvement in economic growth in 2007. This bodes well for both the jewelry industry as well as for the fiscal health of this nation. With its huge population experiencing rising disposable personal incomes, we expect to see further strength in India’s manufacturing sector, which produces most of the goods consumed by the country’s shoppers.

• India’s economic fundamentals remain sound, and prospects for the economy are positive. Higher interest rates could take some of the wind out of the sails of GDP growth going into 2007, but that will not keep India’s economy from overheating. The resilience of the elephant economy is amazing.

• Jewelry demand is expected to continue to rise for the foreseeable future. Two key factors will fuel demand for luxury goods: 1) solid economic growth, and 2) a rapidly growing middle class of consumers.

Middle East – A Small Giant

• Despite the prospects of lower oil prices, consumers in the Middle East are awash in cash, and are looking for ways to spend it.

• Many of the local Middle Eastern economies are attempting to boost jewelry demand, from both local shoppers as well as tourists. For example, Dubai is positioning itself as the luxury goods capital of the world. It already has a huge niche in the gold jewelry business; and, it plans to carve a niche out for diamonds and other luxury items.

• Jewelry and diamond demand are expected to continue to rise in the Middle East for the foreseeable future. Even if global GDP slows, consumers in this geopolitical region have plenty of reserve cash to spend as they please.