Storm clouds are on the horizon for the global wine trade and I am worried because I can’t really say how things are going to develop in the short and medium terms.
The problem is that the disruptions are both broad and deep. They are widespread throughout the commodity chain and impact both the supply- and demand-sides of the market. It’s a lot to take in. Herewith a brief sketch of the situation as I see it today.
Storms on the Supply Side
Some of the storms on the supply side are literally storms — wind, hail, freezing temperatures in the main winegrowing regions of Europe plus drought and wildfire smoke taint elsewhere, especially California.
The increasing extreme weather impacts are unlikely to diminish and inject elements of risk and uncertainty into the supply side of the market. Some of this risk is inherent to agriculture, of course, but it seems like the factors that punctuate equilibrium are both larger and more frequent. Increasingly hard to predict what’s coming over the horizon.
Storms on the Demand Side
From a global perspective, as I explain in my recent book Wine Wars II, a small number of countries and regions (France, Italy, Spain, California) shape supply conditions and an equally small number (USA, UK, Germany, China) are key forces on the demand side.
Each of these countries if facing its own economic crisis and taken together they suggest major impacts on both global wine imports and, according to a recent IMF report, the prospects for a global recession. JPMorgan CEO Jamie Dimon is predicting a US recession within six to nine months.
The storm clouds are somewhat different in each country but the fact that they have come together at the same time raises concerns. Inflation is both high and persistent in the US, for example, causing the Federal Reserve to double down on interest rate increases. The hope is a “soft landing” that would slow the economy enough to reduce wage growth without actually increasing joblessness and tipping the economy into recession.
This is a tough target, especially because monetary policies are subject to what are called “variable lags.” You roughly understand what will happen, but not when. Imagine driving a car with variable lags on the brakes, accelerator, and steering! In theory you might be fine but in practice you will probably end up in the ditch.
The recent declines in equity prices and widespread cooling of the housing market is another concern. A recent Rabobank report suggests that sales of super-premium wines, which seem to persist even when income takes a hit, are not immune to changes in net worth.
So it is entirely possible, following Dimon’s lead, that the US will spend 2023 with both falling income and rising prices. Some wine market niches might be little affected by this combination, but the broad market will certainly suffer.
German and UK Problems
Germany is known for its bulk wine imports, and these are likely to be squeezed by rising energy prices and falling output in its energy-dependent manufacturing sector.
What will German consumers choose: shivering in the cold while they drink their usual ration of wine? Or staying warmer but cutting back on price or quantity? I will leave the answer to you.
The UK market, which is in some ways the wine trade’s most important, will suffer higher energy bills this year and next, too. But its problems go deeper. Already more economically fragile than the other countries discussed here, it must now confront the fact that its new government seems to be both economically reckless and politically tone-deaf (an unusual combination — it is usually one or the other). So the Bank of England has had to raise interest rates even faster than expected and invoke emergency measures to prevent fire-sale losses among pension funds.
To invoke the car example once again, the UK’s drivers are stomping down on both the brake and accelerator pedals at the same time. Not a very safe situation according to most driving instructors. Jeremy Hunt, the newly appointed chancellor, signaled a big U-turn in economic policy yesterday, but much damage has already been done and fundamental problems remain. Watch for more shoes to drop.
Although there was some good wine business news in the original “mini-budget (scheduled duty increases had been postponed), the alcohol tax increases have been restored and the outlook for the wine trade is grim. Will UK consumers spend their inflation-reduced purchasing power on the higher mortgage bills that are coming soon due to rising interest rates … or will they buy wine? Once again, the answer’s up to you.
China’s Economic Bicycle
A few years ago we would have looked to China for a ray of sunlight in the global storm, both in terms of the wine trade and more generally. But not today. The Chinese economy is fragile right now, with many risks to consider, especially in the possibility that the property bubble might burst or deflate.
I have argued that the Bicycle Theory of Economic Growth applies to China. A bicycle is only really stable as long as it keeps moving forward. Once it stopes, staying upright is a real balancing act. I think China is much the same — it has to move ahead rapidly to keep its inherent contradictions from tipping it over. The property market crisis is a clear example of this. As growth has slowed, consumers are now refusing to pay their mortgage bills for housing still under construction.
Five years ago, China would have been the engine we counted upon to pull the global wine trade and, indeed, the global economy, out of its storm. Now its weakness on both fronts (covid lockdowns prevent a return to normal wine market conditions, for example) stand in the way of recover.
What next? That’s the question on the cover of last week’s Economist newspaper. The Economist speculates that we are entering a new era of global economic policy. Hard to know where that path will lead.
What’s next for the global wine trade? The combination of demand- and supply-side storms I have outlined here make it hard to know. What next? Too soon to tell, I think. Stay tuned.