#4: Economic Trends and Their Impact on the Art Market in 2024
Inflation continues to drive up costs across all sectors, and the art market is no exception. Rising prices have eroded collectors’ purchasing power, often forcing them to tighten their budgets.
Historically, periods of global inflation, such as during the 1970s and early 1980s, brought significant volatility to art prices. In more recent years, the global art market contracted by 4% in 2023, dropping from $67.8 billion to $65 billion, according to a joint report by Art Basel and UBS. This marked decline, following two years of post-COVID growth, was largely attributed to the combined effects of inflation and geopolitical crises.
The decline in sales of ultra-high value works (priced at $10 million or more) was a key factor in the overall market contraction. Amid increasing interest rates, stubbornly high inflation, and political instability, buyers become more selective and cautious at the high end of the market,” the report noted. These high-end sales, which were pivotal to the market’s recovery in 2021 and 2022, became more challenging to achieve in 2023.
Interestingly, despite the drop in high-end sales, overall trading volume increased, particularly among galleries with turnovers under $500,000, which reported an 11% rise. While this offers a silver lining, many mid-tier galleries have struggled with increased operational costs. Experts predict that the sector may take at least another year to stabilise fully.
Geopolitical Instability and the Art Market
The art market in 2024 faces significant strain from geopolitical events, particularly the ongoing wars in Ukraine, Gaza, and Lebanon. The Global Art Market Report shows that auction sales fell by 7% to $25.1 billion, while dealer sales dropped 3% in 2023. Larger private dealers (those with annual revenues exceeding $10 million) reported an average decline of 7%. These figures suggest that auction houses are feeling the pressure more acutely than private dealers, as buyers become increasingly wary of making large-ticket purchases amid global uncertainty.
Adding to this strain are sanctions imposed by the US, EU, and UK on regions involved in geopolitical tensions, such as Russia, Belarus, and Iran. These sanctions restrict dealings in cultural goods, luxury items, and artworks, leading to further disruptions in global art transactions. The alignment of Western sanctions has so far been consistent, but there is the possibility of divergence if political shifts occur, particularly with the upcoming US elections. In contrast, regions like the Middle East and parts of Asia, which have not imposed similar sanctions, have absorbed some of the art trade flows previously directed towards the West. This evolving sanctions landscape introduces additional complexity to an already uncertain market.
Cerutti’s 3M's
At the Art Business Conference in London in September 2024, Christie’s CEO Guillaume Cerutti highlighted three significant factors—dubbed the "3M’s"—that have contributed to the downturn in the art market. He cited macro-environmental factors such as political instability and war, money-related issues like rising interest rates and tightening liquidity, and the overall mood of buyers, noting that art sales are often driven by sentiment. These challenges contributed to auction sales falling by 25% at Sotheby’s and 22% at Christie’s in the first half of 2024.
Despite these economic headwinds, there remain pockets of resilience within the art market. Certain segments have not only weathered the storm but thrived, providing optimism for the future.
Resilience in the Art Market: Lending and Private Sales
One area of resilience has been the Art lending sector, which continues to grow as collectors opt to borrow against their artworks rather than sell in a shrinking market. Bank of America recently reported that its art loan book is up 10%, exceeding industry expectations. Many large specialty lenders have also noted a rise in demand. In a market where selling at a reduced price can be a costly decision, borrowing against art offers collectors a viable alternative, despite the trade-off of paying higher interest rates.
However, there may be relief on the horizon. Both the Federal Reserve and the Bank of England have signalled that interest rates are expected to decline. In September 2024, the Federal Reserve delivered a 50-basis-point rate cut, its first in four years, and projected further cuts through 2025. Similarly, the Bank of England has reduced rates from 5.25% to 5.00% and hinted at more reductions. These moves are expected to further boost the art lending market, providing collectors with a lower cost of borrowing.
Another resilient sector is private auction sales. Cerutti noted that 2024 has seen some of the best six-month results for private sales at Christie’s, despite the broader market downturn. Sotheby’s has also reported over $1 billion in annual private sales for the last five years. In times of economic uncertainty, private sales provide a safer haven for sellers by allowing for discreet negotiations and greater price protection compared to the public auction market.
As Brooke Lampley, formerly Global Chairman at Sotheby’s and now at Gagosian, noted in an interview with ARTnews, sellers are often hesitant to adjust their pricing expectations during economic downturns. This reluctance typically leads to a contraction in public auction supply, as many are unwilling to lower their asking prices. In response, auction houses have increasingly turned to auction guarantees to stimulate sales and provide sellers with a sense of financial security.
This shift toward private sales enables sellers to avoid public scrutiny over pricing and allows for greater flexibility in negotiations, illustrating how the art market has adapted to challenging economic conditions.
“We’ve been able to keep up sales to a degree through that. There is high-end transactional activity well beyond five million dollars, and even hundreds of millions for single works of art. But it’s happening privately, where people have greater control over price.”
Regulatory Landscape: European Tax Reforms and UK Temporary Admission
Beyond economic challenges, regulatory changes are introducing a new layer of complexity to the art market. The European Union is set to implement EU Directive 2022/542, which aims to harmonise VAT regimes across its Member States. By January 1, 2025, these changes will allow for reduced VAT rates on art sales within local markets, providing benefits for museums, galleries, and collectors. However, each Member State must first transpose the directive into national legislation, which introduces an element of uncertainty for those operating across multiple jurisdictions. For galleries and auction houses engaged in cross-border trade, navigating these evolving VAT regulations will require careful planning as they adapt to the shifting regulatory environment.
Additionally, the EU Regulation 2019/880, which takes effect in 2025, will impose new import restrictions on cultural goods. The regulation requires import licenses for certain items, such as archaeological artifacts over 250 years old, and importer statements for artworks over 200 years old valued above €18,000. This is aimed at preventing the illicit trade of cultural objects but could also create administrative hurdles for galleries and auction houses that import and export valuable works of art. As a result, market participants will need to adjust their business practices to comply with these new requirements, adding further complexity to cross-border transactions within the EU.
In the UK, attention is turning to the potential simplification of Temporary Admission (TA) rules, which could ease the process for galleries and auction houses to import and re-export goods without paying duties. Temporary Admission is a customs procedure that allows high-value items like artworks and antiques to enter a country duty-free, provided they are re-exported within a set timeframe. VAT and duties only apply if the goods are sold domestically.
Since the official implementation of Brexit in 2020, art, antiques, and most cultural goods entering the UK from the EU have faced a 5% import VAT and increased bureaucracy. This has significantly impacted cross-border trade, with UK art imports dropping to $2.8 billion in 2022—less than half of the 2015 level, prior to the Brexit vote.
2024 Elections: Political Shifts and Their Impact on the Global Art Market
Political shifts in 2024 are poised to significantly impact the global art market, and in particular the UK and US which together account for ~60% of the market.
In the UK, the Labour Party has recently taken power. While the party has stated that there are "no plans" to raise certain taxes, wealthy collectors and galleries remain cautious about potential changes to wealth and capital gains taxes, which could affect the art trade. With Labour’s focus on addressing the gap in public finances, there is a possibility that Capital Gains Tax (CGT) could increase under the new government.
In the UK, Capital Gains Tax applies to the sale of art when the proceeds exceed the annual exemption threshold. For the 2024/25 tax year, this exemption is set at £3,000 (or £1,500 for trusts). This means that if you sell art and your total gains surpass this threshold, you are liable to pay tax on the excess amount. Previously, the exemption stood at £12,300 in 2022/2023, so this reduction could already have a significant impact on those planning to sell their collections.
Given the potential for higher CGT rates under the Labour government, now may be an opportune time for collectors to sell their art to take advantage of the current lower tax rates. Doing so could maximise financial returns and safeguard investments before any policy changes are implemented.
Meanwhile, in the US, the upcoming U.S. Presidential election on November 7, 2024, is set to shape future trade and tax policies, which could have significant repercussions for the art market. Under Donald Trump's previous administration, tariffs were imposed on European artworks, particularly affecting imports from the UK and Germany. If Trump is re-elected, there could be a return to protectionist trade policies, potentially complicating the global movement of artworks and increasing costs for U.S.-based collectors and galleries.
Elections generally bring a degree of uncertainty to financial markets, and the art market is no exception. According to experts, geopolitical tensions and fluctuations in tax policies are critical issues that can impact investment decisions, including those related to high-value assets like art.
What is clear is that the outcome of the 2024 U.S. Presidential election will significantly shape the art market in the coming years, influencing the flow of cross-border transactions and setting the tone for the regulatory environment that galleries, collectors, and auction houses will need to navigate.
