Growth is the big question mark for the global economy and for the US wine market. The International Monetary Fund released their report on global growth last week, for example, and it was one of those situations where you wonder if your glass is half empty or half full.
The forecast for global growth was in the range of earlier estimates — about 6% economic growth for 2021 — but this solid expected performance was a combination of higher growth for the U.S. (7% growth) and some other developed countries with downgraded growth forecasts for less developed countries (LDCs), many of which continue to struggle with the covid pandemic.
The Global South is experiencing unexpected headwinds. Although many LDCs are projected to grow faster than the richer countries, as the table at the bottom of this column shows, the LDC growth rates shown here are lower than previous projections.
A two-speed global economy, where rich regions accelerate and poorer countries slow down, inevitably exposes fault lines that no one wants to see break open.
Planet Wine Concerns
Here on Planet Wine we are concerned about growth, too. 2020 was a good, bad, and ugly year for wine. Some brands did very well pivoting to new sales channels, others struggled to hold their own, and some really suffered. Many analysts believed that as the economy opened up from pandemic restrictions in 2021 we’d see a surge of wine spending, a rising tide of wine sales to raise all boats and solve a lot of problems.
That does not seem to have happened yet and so there is much concern. Why hasn’t broad wine market growth returned along with rising economic activity in general? Has the wine market changed in some fundamental way while we were pre-occupied with other things? Did the pandemic accelerate a market decline that was already under way?
The Bicycle Theory of Growth
As a recovering economics professor, I can’t think about questions of growth without picturing bicycles and locomotives because, unlikely as it may seem, these are useful ideas when analyzing growth.
The Bicycle Theory of Growth was originally invented to describe the dynamics of the European Union. The idea was that the EU is like a bicycle. It is safe and stable so long as it keeps moving ahead. But, like a bicycle, it becomes unstable once it stops and can easily tip over. The Bicycle Theory has many applications — I think the situation in China is a good example. Every important institution contains a variety of tensions and conflict, and pushing ahead — growth — is a way to deal with them. Once growth comes to a halt, inherent instability takes over.
The wine market is much the same. The wine business has many structural problems, but strong growth can patch up some of the weaknesses. Every week my email inbox is filled with press releases that stress growth. New AVAs. new wine brands, new wine products. Everyone is trying to grow their patch of the wine business and that can work OK if the whole market is growing, too. But that growth was already slowing down before the pandemic and now things look even worse.
Houston, do we have a bicycle problem?
The Locomotive Theory of Growth
How do you keep your bicycle moving ahead? In global economics we also talk about the Locomotive Theory of Growth. All the countries are like freight cars. They may have different ultimate destinations, but right now they are linked together in a train and heading in the same direction. It would be great if several cars helped push the train forward — and sometimes that actually happens — but all that’s really necessary is that one or two big countries or regions have enough growth to pull the rest along. Like a locomotive, get it?
The U.S. is the global locomotive in 2021 according to the IMF analysis, with fast growth powered by huge fiscal deficits and $120 billion per month of Federal Reserve quantitative easing asset purchases. Even with these massive injections, however, the U.S. economy only recovered to its pre-pandemic level in the 2nd quarter of 2021, so there were about 15 months of lost potential growth — a bit less aggregate impact than earlier forecasts projected, but still a substantial hit.
The global economy overall has also recovered to 2019 output levels, but this is mainly because of growth in the US and China. You might think that China’s amazingly quick recovery would pull the world ahead, but the Chinese economy has taken an inward turn that limits its international impact.
So all eyes are on whether the U.S. economy can keep up the head of steam it has developed and sustain it through the end of some of the stimulus payments and the Federal Reserve’s quickly-approaching asset-purchase “tapering.” It’s a big deal because if the U.S. locomotive slows, what country or region take its place? There is also the problem of how tightly the train is liked together, which why the IMF is so concerned about the two speed growth finding.
How does the Locomotive Theory apply to wine? Well, maybe it doesn’t! But even before the pandemic the US was losing steam as the global wine market locomotive. Many hoped that Chinese wine buyers would pick up the growing slack, but the most recent OIV statistics suggest that hasn’t happened.
Why has US wine consumption lost momentum? Maybe the US problem is this: not so long ago the wine market was dominated large mid-market segments that sort of pulled the whole industry along with them. I don’t want to push this too far, but it was sometimes almost possible to talk about the wine market as a whole and it would mean something because the segments were linked together to a certain extent.
Now — and I do think the pandemic has magnified this — the market segments are not so well connected. The locomotive in 2020 was wine in the segments that NielsenIQ calls Luxury and Super Luxury. It is hard to see how this strong growth helped pull the rest of the market along.
So I have the same concerns about the wine economy that the IMF seems to have about the global economy. Can the locomotive effect endure? And what happens if the train it is pulling falls apart?
Here is a summary table from the IMF report with the most recent growth projections updates. See the full report for details.