Green shoots on thin ice

Green shoots on thin ice

EUROPE'S LUXURY bosses have taken up gardening. LVMH, the world's largest luxury group, reports accelerating growth; Kering, the owner of Gucci, calls its first half a return to growth; the consultants at Bain detect signs of life in mainland China. The horticultural metaphor is hardy, having entered the economic vocabulary when a British chancellor spied green shoots through the gloom of a recession in the early 1990s. Yet the shoots on offer now grow only at the top of the garden. On July 29th Hermès, the industry's most resistant house, reported second-quarter sales up 6.7% and watched its shares fall 11%. Investors had wanted proof that China's great middle was buying again. What they got was evidence that the thaw is real, thin and reserved for the very rich.

To see the gap between picture and fine print, start with LVMH. In the first half of 2026 it recorded revenue of €38.6 billion, up 2% organically and accelerating to 3% in the second quarter, with Asia excluding Japan, up 6%, the fastest-growing region. The pattern within is lopsided: watches and jewellery, led by Tiffany and Bulgari, grew 9%, while fashion and leather goods, the business that made Louis Vuitton a global byword, trundled along at 1%. Beneath the headline, LVMH's own commentary was sombre: Chinese local and tourist demand was flat in the first half, with spending concentrated around promotions. Growth, management explained, is appearing where wealth is created — in America, in South Korea and at the top of China's income pyramid — rather than across the country's aspirational middle. That distribution is the story, not the direction of travel.

Kering offers the same picture in reverse. Gucci, the battered label that spent two years bleeding customers, saw comparable sales fall 2% in the second quarter — an improvement management calls its strongest sequential acceleration in several quarters, yet still a decline. Mainland China, Kering concedes, remains challenging; the group is pruning its retail network, closing 84 shops in the half and targeting 100 for the year. Hermès, which rations supply and never chased the crowd, grew leather goods by more than 10%. Its chief executive, Axel Dumas, calls the mainland "stabilised, not recovered": purchases there are driven by property and stock markets, he says, and "I don't see a great improvement." Growth in America, up 14%, and Japan, up 12%, handles the work mainland footfall used to do, as Chinese tourists buy handbags priced cheaply in yen.

The statistics describe a K-shaped market. Bain & Company, a consultancy, estimates that mainland China's personal-luxury market shrank by 3% to 5% in 2025, after a collapse of 17–19% in 2024. Inside those numbers the old boom's engines kept shrinking: fashion fell 5–8%, leather goods 8–11% and watches 14–17% in 2025, while beauty recovered. Bain forecasts only modest growth in 2026, laced with continued volatility and uncertainty; the recovery, it warns, will be fragile and uneven across brands.

The reason the thaw is so thin is that the boom's two engines — a mass of aspirational buyers and ever-higher prices — have both broken. Property still dominates household wealth and keeps deflating; the middle class saves rather than splurges. Status-signalling leather and ready-to-wear are precisely the categories still shrinking, as shoppers drift toward what researchers call "practical self-reward" — travel, wellness, objects that hold their value. Oliver Wyman, a consultancy, found the same polarity: Chinese customers spending more than 40,000 yuan a year on luxury held their ground, while those below the line cut back sharply. Local brands are seizing the leftover demand, and the secondhand market grew by 15–20% in 2025. Even in the resilient trades the customer is courted with credit: Tiffany, Bulgari and Cartier now offer interest-free instalment plans of up to 24 months on the mainland — instalment lending as a disguised price cut.

To be sure, the trough has passed. Comparisons have turned favourable, tourism has revived, and the direction is up rather than down. But part of the "China" recovery is geography and bookkeeping. LVMH says its Asian customers spent less in Asia and more in Europe and Japan during the quarter, and its duty-free arm, DFS, has sold its Greater China business to China Tourism Group Duty Free. Exchange rates compound the confusion: LVMH's reported revenue fell 3% even as organic sales rose 2%, because currencies lopped five percentage points off growth and shaved nearly €700m off first-half operating profit, with about €1bn more to come. A recovery that shows up in one currency and melts in another is trading on thin ice.

Which brings the analysis to the political weather. French cognac already carries Chinese anti-dumping duties, a legacy of the Brussels-Beijing standoff over electric vehicles; in May, Beijing threatened probes into French cosmetics and alcohol should the EU press its case against Chinese overcapacity. Luxury's handbags have so far dodged the customs men. But the sharpest green shoots at LVMH — wines and spirits, up 5% on the strength of Hennessy's recovery in China — sit squarely in the line of fire. A recovery that depends on the tolerance of a customs authority is fragile by construction.

Bosses have every incentive to reach for horticultural language: a growth story steadies share prices and flatters new creative regimes at Dior and Gucci alike. The discipline for investors is to hold apart resilience from revival. Hermès and the big jewellery franchises compound even with the Chinese middle on strike; Gucci and the aspirational houses do not, until that middle returns. The market keeps paying for revival — investors wanted accelerating growth from Hermès and got mere resilience, which is why its shares fell — rather than for the stable, narrow thaw the data describe. The break condition that would vindicate the bullish reading is specific: aspirational demand returning to mainland leather goods and fashion. It is the one outcome that neither the chiefs nor the consultants predict.

The green shoots are real. But they grow at the top of a garden whose middle has not yet thawed — and the weather is outside any luxury house's control.