Last week, an unprecedented series of events in the US financial sector shook global markets, leaving retailers and brands anxious that already tough trading conditions could worsen still. Joe Ayling reports on how the Wall Street meltdown dealt a further blow to fashion operators and could mean that international expansion is the best short-term fix.

Just as the fashion industry was beginning to deal with the sobering realities of the credit crunch, rising commodity prices and imminent recession, the US' fourth biggest bank, Lehman Brothers, went bankrupt last week sending the markets crashing.  

The domino effect also saw fellow investment giant Merrill Lynch sold to Bank of America and insurance giant AIG scramble a US$85bn rescue package together with the US government in a week that will go down as one of Wall Street's worst.

Since the market meltdown, Goldman Sachs and Morgan Stanley have changed from being investment banks to bank holding companies with tighter regulation.

And the US Congress is moving closer towards a $700bn rescue plan for the sector, prompting a presidential address to a worried nation this week.

The subsequent turbulence has been felt the world over, with Russia's Stock Market temporarily shutting down and the UK's HBOS bank agreeing to be taken over by Lloyds TSB.

Speaking on the BBC's Question Time programme, Simon Wolfson, the chief executive of UK fashion chain Next, last week supported the initial Government interventions at AIG and HBOS.

He said: "The key thing the government has to do, which to be fair they have done, is as soon as looks as if the depositors are getting nervous, act and act quickly.

"Whether that is the US government acting to shore up AIG or the UK government and Lloyds acting to shore up HBOS. This is what we need to focus on rather than exaggerating the problem, which in itself will cause huge problems."

The collapse of investment banks, widely blamed on short-selling, high-risk taking city traders dealing in toxic loans, are now expected to result in further Government bailouts, higher taxes and rising unemployment - not the order of the day for retailers and brands post-credit crunch.

Furthermore, already under-fire banks are likely to tighten lending regulations and increase lending charges as a result of the meltdown.

All these market difficulties are intertwined, of course, and trace back to excessive consumer borrowing and risky loans of this bad debt between global financial institutions, leading to well-documented difficulties at mortgage firms Fannie Mae, Freddie Mac and, in the UK, Northern Rock.

Industry braces itself
Listed US fashion companies have been forced to react promptly to the market volatility, and Nike's board of directors on Monday (22 September) approved a new four-year $5bn share repurchase programme.

At the consumer level, the latest crisis could hardly have struck at a worse time, with the Thanksgiving and Christmas holiday seasons on the horizon.

The Washington-based National Retail Federation has projected that US sales will rise 2.2% for the upcoming holiday season to $470.4bn, falling well below the ten-year average of 4.4% and the slowest growth since 2002, when holiday sales rose 1.3%.

"Current financial pressures and a lack of confidence in the economy will force shoppers to be very conservative with their holiday spending," says NRF chief economist Rosalind Wells. "We expect consumers to be frugal this season and less willing to splurge on discretionary items."

NRF adds that with the current financial industry crisis continuing to chip away at consumer confidence, it does not foresee an economic turnaround until the second half of next year.

Meanwhile, British Retail Consortium spokesperson Richard Dodd told just-style: "The banking turmoil of the past two weeks will further undermine already weak consumer confidence. It makes nervous consumers even less willing to spend the money they have got."

Fleeing the market madness
The financial sector is a major revenue earner for US and UK economies, particularly now that their once strong production bases - including fashion and footwear - have shifted overseas.

Indeed, in line with the cyclical nature of economics it is quite clear exactly where in the boom and bust cycle the Western world resides right now.

Meanwhile, emerging 'factory' markets like Brazil, Russia, India and China (BRIC) are ready to pounce on this impending shift in economic power and are, in contrast, booming.

Once again, the fashion industry is intrinsically linked to this shift, and high street chains have been jostling for positions in China, the Middle East and Russia to shore up falling sales in their domestic markets.

In the past few months alone, Iconix Brand Group, Berghaus, Uniqlo and Lindex have all started up operations in the BRIC countries.

So it could well be that the global nature of the fashion industry bears its fruits during difficult economic times, with well recognised brands like Nike and Adidas, together with retailers including Zara and H&M, able to cash in on faster-growing markets.

However, it is also worth noting that although the current downturn in the US economy has weakened confidence, an eventual return to form is simply a matter of time.

Until then though, discretionary items like clothes and shoes will be squeezed off most ordinary shopping budgets, especially with oil prices rising as a result of last week's events.

Therefore, a short term migration to emerging markets might be a lucrative way for retailers and brands to live through times when even the bankers are going bust.

By Joe Ayling, news editor.