Luxury has lost its lustre. As fashionistas become recessionistas and their appetite for £10,000 python-skin handbags and glitzy watches wanes, companies making and selling top-name brands are anticipating a miserable Christmas.

"The third quarter has been much tougher and things have got even worse in the last month." says Dennis Weber, a luxury goods analyst at Dresdner Kleinwort. "We expect the downward trend to continue into Christmas - the key time for these brands - with no let-up in the new year."

Milton Pedraza, chief executive of industry research group the Luxury Institute, concurs."I think we're going to see a lot more pain through the holiday season," he says.

Trading next year is expected to be no better. Consultancy firm Bain & Co forecasts the luxury goods market will contract by up to 7% in 2009, the first time the sector will have recorded an annual sales decline since Bain began tracking it in the early 1990s. The most bearish forecasts see sales in developed markets retreating to 2005 levels. Japan is already in a "luxury recession" - with negative annual growth - and the US is expected to join it next year. Declining luxury hotel occupancy rates also bode ill for the industry, since 30%-40% of sales in Europe's luxury stores come from non-Europeans.

This represents a sea change. Only a few months ago, industry executives still spieled out a well-rehearsed mantra: the sector seemed immune to the global downturn. They claimed buyers of their brands - high net-worth individuals -were not going to stop splashing out despite the economic meltdown. But in August, with the financial crisis deepening, Italian jeweller and watchmaker Bulgari issued a profits warning. Although its problems were dismissed as company-specific, jeweller to the glitterati Theo Fennell soon followed suit.

And then the almost unthinkable happened. Hermès, that bastion of old-world luxury, warned that even its well-heeled customers were feeling the pinch.

Chief executive Patrick Thomas admitted that sales growth would fall below expectations. With its coveted Birkin and Kelly bags and avant-garde clothing designed by Jean Paul Gaultier, analysts had considered it the most resilient of all the European luxury brands. Since then, warnings have poured out of the sector.

Burberry, LVMH and Richemont all admitted trading has been challenging, while in the US, top-end department stores Saks, Neiman Marcus and Nordstrom have reported double-digit declines in sales. Meanwhile, Cacharel, Donna Karan and Vera Wang have all cancelled next February's catwalk shows in the world's fashion capitals, leaving the autumn/winter season missing some of its stalwart names.

So what changed? Industry insiders point to the "Lehman effect" as key to the dramatic slide in sales in the US, which remains the world's biggest market for luxury goods.

"Luxury consumers were shell-shocked," Pedraza says of the investment bank's collapse. This is borne out by the experiences of a leading fashion brand, where one of the top brass says sales dived 40% in its stateside stores on the day of Lehman Brothers' demise. The recovery since then, he said, has been slow.

Even more important than the plunging value of the elite's shares portfolios to their spending behaviour is the gloomy mood. "What sets these brands apart is that they need a feelgood factor for people to keep spending," Weber acknowledges.

Conspicuous spending fell out of fashion as markets plummeted. Boasting about your Balenciaga and parading your Prada suddenly seemed distasteful given the economic climate. Bridget Cosgrave, the fashion and buying director of Notting Hill boutique Matches noticed the shift: "There was an overnight change, a reversion from obvious spending."

So which businesses are best-placed to cope with the change? "I expect companies with very established brand names to fare best: old, high-end brands," Weber says. "Hermès, for example, is much better placed than Burberry, which targets the mass market."

The British fashion house is likely to be hit hard. Like-for-likes sales turned negative in October and the group announced plans to cut costs, a risky strategy given the reliance of luxury businesses on maintaining an opulent image. Analysts warn that as a late entrant in emerging markets, its position there is much less secure than that of many of its rivals.

In general, ultra-wealthy consumers in Dubai, Moscow, Beijing and Shanghai have acted as a buffer of growth for many luxury players in recent years. Emerging markets are forecast to continue growing next year, albeit much more slowly. Meanwhile, for the first time, currency fluctuations should have a positive effect, giving some relief to both European and British companies.

But with sales in developed markets expected to go to hell in a handbag, these are only small comforts. As the credit crunch is felt by even the highest echelons of society, it seems even this glamorous elite have realised they can do without many of life's luxuries.