Is London the world’s fashion capital?

The commercial success of Britain's high-end fashion designers is providing a much-needed boost to the economy, says James McKeigue.

What's happened?

An unlikely cavalry is riding to the rescue of the British economy. British designers, who spent most of the 20th century in the shadow of Milan, Paris and New York, are fighting back. Since the 1960s, Britain has shaped fashion trends, but it's only in the past two decades that this has translated into commercial success.

The rise of designer labels and chains such as Vivienne Westwood, Paul Smith, Stella McCartney, Burberry and Mulberry has helped spending on British designer fashion grow by 19% per year since 2001. On the high street, fashion has also proved resilient. Spending on clothes and shoes grew 6% per year in real terms throughout the last decade, although retail prices fell.

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Can fashion make much difference?

Yes. A report commissioned by the British Fashion Council found that the industry contributes almost £21bn to the economy. That's 1.7% of GDP, more than car manufacturing. About 68% takes place in the retail sector. While Napoleon is said to have disparaged Britain as a "nation of shopkeepers", retail is a labour intensive industry that could ease our youth unemployment crisis.

Selling clothes creates about 650,000 jobs in Britain, while the industry total is 800,000. That's 2.8% of employment (more than telecommunications). Fashion contributes £13bn a year in tax. Add multiplier effects, such as inbound fashion tourism, and the figures go up.

Don't we make clothes anymore?

Since the mid 1990s, clothes manufacturing has lost out to low-cost emerging-market producers. The gross value added (GVA) of fashion manufacturing has shrunk by almost two-thirds since 1995, while the textiles industry's GVA halved. But the UK's clothing and textile industries still produce £8.6bn of goods per year and niche manufacturers are reviving. Fat Face and River Island say they will start sourcing more garments in Britain partly because of the marketing benefits.

But fewer firms will tolerate unreliable delivery and quality and long supply chains now the pound has fallen. Some retailers, worried about unsold stock, are scaling back and placing smaller orders closer to home.

The success of top-end British designers, such as Mulberry, has encouraged them to expand domestic manufacturing from a small base. Other firms specialise in anti-bacterial yarns or using nano-technology to produce stain-resistant yarns. The revival makes sense, says The Economist. "Fashion is just the sort of thing Britain is supposed to be good at in this post-industrial age: creative, high-value-added, cluster-based."

What about emerging markets?

So far, increased emerging-market spending power has been good news. British designers export two-thirds of their clothing, while our footwear industry sells more than 90% of its products around the world. The global luxury market will increase by £37bn to £107bn by 2015 and luxury brands such as Burberry should capitalise.

The rising prestige of London Fashion Week also helps. More edgy' than competitors, it highlights young designers. Around £100m of orders were placed at last week's show, with around three-quarters from foreign buyers. Insiders claim last year's royal wedding, showcasing a wedding dress by Sarah Burton of Alexander McQueen to two billion people, also helped.

Internet analytics firm Global Language Monitor claims London has replaced New York as the fashion capital. Yet many think this is not enough. Insiders want the government to relax visa rules, making it easier for Chinese tourists (who spend three times as much as the average British visitor to the capital) to visit.

The yearly number of Chinese tourists will double between now and 2020 to 300,000. Yet emerging markets may not pay top-dollar for Western luxury goods forever. British fashion professors have been poached by Chinese universities, sparking fears that China could become a serious rival. Counterfeit goods are a more immediate threat see below.

What about the internet?

Online shopping's share of the UK retail market grew from 2% in 2003 to 9% last year. Commentators blame the internet for failures, such as that of retailer Peacocks, but it's not that simple. Internet shopping has coincided with rising spending on fashion, suggesting that the internet stimulates sales.

Around 50% of online fashion sales take place through sites of shops with physical stores. Internet operations are less labour intensive but some shop floor jobs will be replaced by the delivery van. It's no coincidence that DHL sponsored London Fashion Week.

The piracy paradox

In China, around 30% of mobile phones are fakes, while 80% of software sold in 2010 was pirated. Beijing's markets are filled with fake Guccis, Pradas and Burberrys. These end up all over the world and frustrate Western brands.

Yet rip-offs might not be that bad, say US law professors Kal Raustiala and Christopher Sprigman. To grow sales, "customers must like this year's designs, but must become dissatisfied with them, so they'll buy next year's".

As fashion can't make old products obsolete, copying moves designs from the catwalk to the masses. And since no fashionista wears what everyone else is wearing, copying fuels the demand for something new. Those who buy fakes don't buy designer goods, either, which can be a problem in itself. Burberry had to modify its style when its iconic check was famously hijacked.