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25 October 2011

SPENDTHRIFT GENERATION Y

Analyst Insight by Rob Walker, Euromonitor International.

When the world economy plunged into crisis in 2008, the generation which lost the most – in terms of jobs and purchasing power – was paradoxically the generation driving a resurgent luxury goods market. But, is this so-called ‘Generation Y’, comprising young people born between 1977 and 1994, resolute enough to cope with another, potentially more damaging, global recession?

Baby-boomers leave future generations high and dry.

The baby-boomer parents of Generation Y were, on paper, the lucky ones. They grew up in largely peaceful times, rode a purple patch of real estate equity growth, enjoyed easy and plentiful access to consumer credit and built up fat and lucrative pension pots. When the bubble finally burst and the walls of once seemingly formidable financial institutions began to crumble, it was their children who bore the brunt.

In particular, access to credit in the world’s developed markets became increasingly restrictive. In the UK, for example, not only did it become difficult for Generation Y to get a foot on the property ladder, after 2008 the concept of home ownership – once the bedrock of material ambition – also began to lose its appeal as property prices went into meltdown.

In addition, there seemed little to cheer about in terms of future prospects as pension schemes deteriorated in value and retirement age was pushed back. After 2008, Generation Y was, in short, paying the price for the financial follies of its baby-boomer parents. One could argue, even, that baby-boomers had borrowed, albeit unwittingly, at the expense of their children’s futures.

Generation Y engages with the present not the future

Despite coming off much worse from the 2008 financial crisis than their parents, Generation Y consumers have been instrumental in bulking out luxury goods consumption over the interim period. Indeed, twenty and thirtysomethings, in both developed and first-tier emerging markets, are widely identified as the trendsetters of luxury demand, driving products as wide ranging as designer handbags and Italian sports cars.

It is actually not as paradoxical as it might seem. Generation Y’s propensity to spend rather than save is indicative of a consumer culture that has lost confidence in the future, or at best has been so badly bruised by global recession that it prefers to enjoy today what it might not have tomorrow. It is not a philosophical shift but an instinctive reaction to the reverberations of the worst global credit crisis since World War II.

Parallels can be drawn with the Brazilian model, where consumer culture over the past six years has been geared towards spending rather than saving (despite having some of the highest interest rates in the world). This has fuelled domestic demand and catapulted Brazil into becoming one of the most attractive fast moving consumer goods market in the worldfor new investment. The propensity of Brazilians to spend can be traced back to the hyperinflation era of the 1980s and 1990s when the value of wages eroded rapidly, encouraging households to offload their cash quickly.

The scars of hyperinflation left on Brazilians have the same effect as the scars of global financial crisis left on Generation Y. In both instances, we see consumers with a reluctance to invest heavilty in the future, preferring instead to maximise their quality of life in the present. It is also striking that Brazil’s own Generation Y accounts for 31% of the population, which is one of the highest proportions in the world. In Japan, for example, Generation Y accounts for 20% of the population, and in the US the share is 25%.

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