Design World Reacts to ECB Interest Rate Hikes
MILAN — No matter the socioeconomic class, household austerity has widely been in fashion here since the dawn of the COVID-19 pandemic. When the European Central Bank last week raised eurozone borrowing costs to their highest level in 22 years, industry leaders in and around the interiors and design sector saw it as another challenge to their businesses. After all, homeowners are unlikely to splurge on the furniture set before they sign on the house.
To curb high inflation, the ECB is likely to raise rates further next month with no signs of abating in the near term. The quarter-percentage-point move was the ECB’s eighth consecutive interest rate hike since it misjudged inflation last year, and raised its rate to 3.5 percent, its highest rate since 2001.
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Following the news, Luca Solca, senior research analyst, global luxury goods at Bernstein, said impact on the design and furnishings sector is a given. On Monday, the cost of a two-year fixed rate mortgage in the U.K. rose to 6 percent, its highest level since 2008, and rates are expected to increase further.
“Higher interest rates lead to downward pressure on real estate values and volumes lead to downward pressure on the design and furnishings sector. I don’t think there is much of an escape, to be fair,” Solca said in an interview, adding that the market has already experienced price weakness and even more so, a significant decline in transaction volumes.
“Hence the dynamic above has already started — both in the U.K. and in the rest of Europe, for that matter,” Solca added.
After the announcement, a note published by UniCredit, Italy’s second largest bank by market capitalization, called ECB president Christine Lagarde’s interest rate policy “hawkish.” Rising interest rates will likely slow wage growth, which will impact more southern European countries like Italy, already behind the curve, and where unemployment stands at 7.8 percent and inactivity is at 33.6 percent, as reported by statistics bureau ISTAT as of April.
By comparison, Spain’s unemployment rate was 13.3 percent and France’s at 7.1 percent in the first quarter of the year. “Last year, the eurozone corporate sector managed to increase its profit margins to above 10 percent. In contrast, real wages are still down by more than 5 percent,” said Erik Nielsen, group chief economics adviser at UniCredit in the “Sunday Wrap.” “Private consumption is not doing well at an aggregate level; total domestic demand remains below its end-2019 level.”
Italian Design Brands, one of the nation’s largest high-end furniture and design holdings, boldly listed its shares on the Milan Stock Exchange in May, despite market volatility. Its chairman and chief executive officer Andrea Sasso said he believes upscale brands will emerge largely unscathed from the interest rate hikes.
“In theory, higher mortgage rates have a consequent impact on the spending capacity for the furniture market, however, [for those] operating in the core high-end design furnishing market the impact on our sector should be limited,” Sasso told WWD following the ECB’s decision. “The ECB maneuvers have been expected for some time, so naturally we were not caught by surprise,” he added.
Luxury Living Group’s CEO Andrea Gentilini agreed. “Considering the fact that we are mainly serving high net worth clients, I do not feel their purchasing patterns and choices will be seriously impacted by the ECB interest rates.”
Luxury Living Group, which produces Dolce & Gabbana Casa, Versace Home, Trussardi Casa, Bentley Home, Bugatti Home and Luxence Luxury Living, sees U.S. cities like Miami, Los Angeles and New York; Dubai and Abu Dhabi in the United Arab Emirates; Riyadh, Saudi Arabia, and Doha, Qatar, as major points of interest in the near term for the group.
RH, formerly Restoration Hardware, which has placed big bets on the European market in its effort to develop the company into a global luxury brand with exclusive galleries, restaurants and lodging worldwide, has also been bracing itself for further central bank hikes.
Nevertheless, RH just opened its most ambitious project yet — RH England, The Gallery at Aynho Park — a 73-acre, 17th-century estate and the crown jewel in its strategy. In the rest of Europe, RH has galleries under construction in London (Mayfair), Paris, Milan, Madrid (two locations), Munich, Düsseldorf, and Brussels, all opening up over the next three years.
“We’re launching it [Aynho] into maybe the worst home environment at the high end that I’ve ever seen in my career. I’ve never seen luxury housing down at the levels we’ve seen from recent reports and we’re at 20-year high interest rates,” RH CEO Gary Friedman said during the first quarter conference call in May.
“We can’t control the macro. But I’d say, I’m more optimistic than less optimistic about our model long term. I don’t see any reason that we can’t return to 20 percent [sales growth] plus mid-20s operating margins long term,” Friedman added.
Up north, Nordic industry leaders expressed caution about the rest of 2023, given the nearby war following Russia’s invasion of Ukraine and the rising cost of living and whether or not mortgages will be more expensive, as investment in design items is something consumers postpone.
“The war in Europe has made a problematic impact on the design sector and could be a challenging year for many companies,” said Copenhagen’s 3daysofdesign’s managing director Signe Byrdal Terenziani, adding that many design companies increased their profits in 2022 versus 2021 and that rally may slow in the near term. Danish firms echoed this message at the Copenhagen Design Fair, also attempting to diversify their offerings to cater to new generations of consumers who are starting their careers in a complex workplace and an even more complex economy.
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