Temperatures have been soaring in Europe in the last few days but as a barometer of how well the industry of managing wealthy persons’ money is going, the state of the world’s luxury market suggests the climate is still chilly.

There are, however, signs that the worst may be over although the outlook is uncertain, Milton Pedraza, chief executive of the Luxury Institute, a research organisation in the US, told WealthBriefing in an interview yesterday.

"I think we have reached the bottom. Luxury had a very rough first half and there finally seems to be some thawing out. However, we see that levels of spending by clients are much softer than last year for most brands," he said.

"I think the worst has passed but now they need to prepare for 18-24 months of slow growth. Brands will need to manage your costs extremely well," Mr Pedraza continued.

As a barometer of how the wealth management industry is doing generally, the luxury goods sector is pretty useful: spending on luxury goods has fallen by double digits, of 20, 30 and 40 per cent across various categories, which is about the same degree of loss in the wealth of high net worth and UHNW individuals, he said.

Those spending figures fit with recent evidence on the luxury sector from the annual Merrill Lynch/Capgemini World Wealth Report, based on data for 2008. The report showed, unsurprisingly, that last year’s economic uncertainty led to a drop in HNWI spending on luxury and experiential travel, with HNWIs from North America decreasing the most (55 per cent). Within the lifestyle spending category, purchases of luxury consumables also fell – 43 per cent of all surveyed HNW individuals, and 60 per cent of those in North America, said they spent less on luxury consumables in 2008.

However, although the world’s wealthy were cutting back on luxury goods, the report found that spending on health/wellness – including spa visits, fitness-equipment installations, and preventative medicine procedures – was the only lifestyle spending category to see a significant increase in spending in 2008.

Such a slowdown in luxury goods spending has certainly not been a shock: the consultants, Bain & Company, predicted several months ago that the luxury sector faced between a 15 per cent and 20 per cent fall during the first two quarters of 2009, and Bain estimated that the worldwide luxury market will begin stabilizing in the second half of the year. That would translate into a net decline of 10 per cent for 2009 overall.

In the face of such pressures, many luxury goods firms are restructuring; improving services and standards of quality, craftsmanship and service while taking out costs, which is a hard combination to pull off, said Mr Pedraza.

One issue restraining spending, besides a simple desire to save money, is the feeling that ostentatious spending is wrong at a time when some people are losing jobs, homes and incomes, he said.

"High Net worth consumers are feeling sensitive because they don't want to be seen as greedy or ostentatious when other people out there are suffering so much," he said.

Different regions will fare differently as luxury markets, he said. Regionally, China is holding up relatively well as a luxury goods market, as is India, although parts of Asia have felt the impact of the credit crunch, he said. Brazil is also a relatively robust market; but Russia, hit by sharp falls in commodities and the lack of a broad-based middle and upper class, has been a tougher market.

The US market, while it has suffered, is highly adaptable. The European market is relatively sluggish and has in any event been relatively saturated by luxury goods, he said.

 As Mr Pedrazi said, the luxury goods market is highly cyclical; any notion that it could ride out the storm has been firmly smacked down. But if the desire to spend does resume, that should suggest that the sun will start to shine on the rest of the wealth management industry as well.