Crystal Gazing Into 2023

1. Crystal Gazing Into 2023 The beginning of every year brings about a flurry of planning activities as companies and individuals set their targets for the year. While we do so, it is wise to review what happened in the previous year, as we begin to make plans for the future. 2022 was a tumultuous year for the world economy in general. The highs of the stimulus and cheap money-driven growth of 2021 lead to the surge in inflation and forced central banks to tighten money supplies as well as increase interest rates. The world is waking up to some of the highest interest rates in over 15 years, after the great financial crisis. Apart from this trend, the world also entered a new and dangerous phase, with the first major war in Europe in 75 years, and a new era of sanctions upending oil and gas prices across the world. While the rest of the world dusted off Covid restrictions and got back to work, China decided to go in a different direction, with citywide lockdowns, only to do a 180-degree turn in December, when forced by public resentment. The resultant surge in Covid cases will be felt throughout the first quarter of 2023. From a diamond midstream perspective, 2022 had a spectacular, and almost unreal start, before the euphoria came quickly down to earth by March. This was followed by an uncertain period, as the war in Ukraine upended diamond supplies, before settling toward the middle of the year. In the second half of the year, US diamond jewellery sales, which had plateaued, started to show signs of dropping, while those in China too slowed significantly due to the impact of lockdowns. US and China are the main jewellery markets and as a result, the industry will end the year on a weak footing and the net polished diamond exports from India are expected to be down by about 7-8% this calendar year. This weakness is expected carry into 2023 as well! Looking ahead into 2023 When projecting the expectations for the rough diamond, polished diamond and jewellery market, it is again important to understand the expectations for retail sales in the major markets. In the US, 2021 was driven by the record Covid stimulus, of over USD 2.7 trillion, or over 10% of the GDP in just 2021, leading to a flare up in inflation. To combat this, the US Fed started raising interest rates from March 2022. While initially they were slow and thought to be behind the inflation curve, they have

2. now raised rates by 4.25% in this year, a record by most standards. These interest rates hikes are leading economists to predict a recession in 2023, although there is no agreement on whether this would be a mild or a severe one. This inflation is demand-led, driven by the bucket loads of free money doled out by the US government. The latest US Fed statements, low unemployment rate, and healthy consumer balance sheets seems to suggest that the world could possibly escape with a mild recession. From an industry perspective, I have highlighted in the past that US jewellery sales (based on the numbers published by the Bureau of Economic Analysis) had effectively started plateauing from the second half of 2021. Simply looking at the year-on-year numbers might give a slightly distorted perspective, wherein the impact of the surge continues to be seen after nearly a year. In any case, even a baseline forecast will have to factor in a drop of 8-10% in the US natural diamond retail sales for 2023. Unsteady China China, the second largest market for diamond jewellery, too does not inspire confidence going into 2023. It has been grappling multiple self-inflicted challenges including the collapse of the real estate sector and the determination to power ahead with a Zero-Covid policy, apart from other systemic challenges like supply chain diversification by large companies. Two of these decisions have been reversed in December. The current Covid wave, thought to have started even before the policy reversal, is likely to continue through the first quarter of 2023, with a large number of deaths being forecast. This, in turn, will affect retail sentiment and the market. It will still take a herculean task to stabilise the Chinese economy, with leading agencies trimming their growth forecast. While lower economic growth would dampen diamond jewellery demand in China, the reduced attraction of the real estate market might prompt greater interest in asset buying demand for gold and diamonds. Overall, the jewellery market would be expected to be weak in the first half, and some stabilisation and positive comparative numbers in the latter part of the year. In the other global markets, Europe and Japan are expected to be plagued by inflation and other economic issues, and likely to have a negative year as well. In general, the dollar strength is expected to continue, and markets which are not dollar-denominated will underperform.

3. In terms of bright spots, India stands out as the market which had a good run in 2022 and is expected to weather the economic storm better than other economies. The diamond jewellery market will also follow, and will be one of the markets expected to have the highest growth. Additionally, the Middle East market, driven by buoyant oil prices, is expected to continue to do well. Luxury brands have had a stellar 2022 and they too will continue their run. To know more: https://gjepc.org/solitaire/crystal-gazing-into-2023/