The credit crisis has finally caught up with the watchmaking and jewellery industry, which for most of this year has maintained a high-wire act to enthralled spectators wondering how long the gravity-defying show could last.

Despite an economic slowdown that began a year ago, sales have continued to grow strongly for most of this year. But luxury no longer appears immune to the economic cycle after an exceptionally weak August, followed by an autumn of bank collapses and crashes on world stock markets.

If you take St Tropez, the summer playground in the south of France for the wealthy, as a bellwether, the number of yachts arriving halved this summer, according to the local press, luxury boutiques reported a fall in average sales from €8,000 ($10,000) last year to €3,000 and hotel staff noticed that instead of posing on the beach, holidaymakers continually checked the stock markets.

"Even at the highest levels of wealth, there is some pullback," says Milton Pedraza, chief executive of the Luxury Institute, the New York-based consultancy, in September.

"The loss of Wall Street jobs and, more importantly, the effects of a less-liquid market on the economy will mean a few more percentage points of decline in revenues."

Many companies have already reported declining sales in the face of a worsening downturn. Richemont, owner of leading luxury jewellery and watch brands, including Cartier, Van Cleef & Arpels, Jaeger-LeCoultre and Vacheron Constantin said in September that the US market was beginning to show signs of a slowdown.

Bernard Arnault, chairman and chief executive of LVMH, the world's biggest luxury goods company, has criticised analysts for describing the luxury goods sector as cyclical. But the Louis Vuitton-to-Dom Perignon group reported a slowing in sales in the three months to the end of September. August in particular proved tough with sales in many of the businesses "way below their growth potential", according to the company, but there was a bounceback in September.

The biggest drop in organic sales growth - from LVMH's existing businesses, as opposed to growth from buying new businesses - was its watches and jewellery business, which includes TAG Heuer, Dior and Zenith. Growth slowed from 15 per cent in the first half of the year, compared with the same period last year, to 9 per cent in the nine months to the end of September. The US was proving particularly difficult but the company was doing well elsewhere.

The very top end of the market seems to be holding out better than the mid-level range. But as Christophe Bédos, head of Boucheron, the upmarket jeweller which is part of PPR's Gucci Group, said in August: "Everything that surfed on the wave of bling is going to be called into question."

Nicolas Hayek, chief executive of Swatch Group, has remained optimistic saying in September that he expected "a very good" 2008 second half. The entry price for the group's Breguet and Blancpain brands starts at about SFr15,000 (£8,000, $13,000).

Exports of the most expensive watches - those with a price tag of SFr3,000 or more - grew by 28 per cent in terms of value in September, compared with September 2007, according to the Swiss Watch Federation (SWF), while watches costing between SFr500 and SFr3,000, fell.

The more expensive timepieces drove a very strong 15 per cent rise in Swiss watch exports, reversing a summer slowdown when watch exports in August grew by 6.3 per cent. The acceleration allayed fears of a sharp downturn in sales.

Nevertheless, the SWF acknowledged a "difficult and uncertain economic environment". For Swiss exporters, that environment has been made more challenging by the strength of the Swiss franc, which recently shot up to a seven-year high - despite the Swiss National Bank's interest rate cut in early October - as investors piled into safe-haven currencies.

Growing concern about the US and European economies falling into recession kept analysts and industry observers busy in recent weeks downgrading their outlooks for next year.

Analysts at Crédit Agricole Cheuvreux, the broker, expect Swiss watch exports to drop by 5 per cent in value next year, while Kepler is more pessimistic, forecasting a 10 per cent fall. Bain & Co, the consultancy which published a global study of the luxury market at the end of October, expects the luxury goods market to enter a recession next year.

It believes luxury sales growth will slow to 3 per cent this year from 9 per cent in 2006 and 6.5 per cent last year. It has forecast falling sales next year, of 7 per cent at constant exchange rates or 2 per cent at current rates.

Bain expects jewellery sales to rise by 2.5 per cent this year - a sharp slowdown from 9.5 per cent growth last year. But watches have proved more resilient, growing by 9 per cent this year. Nevertheless, Claudia D'Arpizio, Bain partner based in Milan says that watch sales will be: "severely impacted by the financial crisis" next year.

One reason watch sales have held up so is because of the strength of emerging markets - watches are usually the first luxury item to be purchased in emerging markets, according to Bain.

In fact the performance of emerging markets could be key to the industry's fortune next year. "Emerging markets will provide some buffer of growth but not enough to offset the strong reduction expected from the consolidated markets, including Hong Kong and Singapore which are key markets for watches," says Ms D'Arpizio.

Sales to emerging markets were still very strong in September, according to the SWF, but Russia was a big disappointment, with exports falling by 15 per cent.

Tumbling stock prices in Russia have taken their toll on consumer confidence and spending. Mercury, a Russian luxury goods group that owns Moscow stores for brands such as Gucci, Prada and Rolex, and showrooms for Ferrari, Maserati and Bentley, have reported a downturn in sales in recent weeks.

Fears about the resilience of emerging markets have increased, in the face of slowing - though still fast - growth in China and the International Monetary Fund's lending packages for Brazil, Mexico, South Korea, Singapore and Hungary.

"I am not sure [emerging markets] are able to offset the weakness in other markets. Everyone is going to be affected," said Francesco Trapani, chief executive of Bulgari, the Milan-based jeweller, last month.

Nevertheless analysts at JP Morgan point out that the emerging markets remain a useful prop for luxury goods sales. "As much as investors may raise doubts on the resilience of emerging markets, they are likely to be a better place to be for the time being than more mature markets and certainly so far than Japan," they say in a recent research paper on luxury goods companies. They expect organic sales up 3 per cent next year but this depends on sales to emerging markets growing by between 10 and 15 per cent.

Meanwhile, those who own an Aston Martin and are wealthy enough to be unconcerned by the economic downturn, can look forward to a new car accessory next year. Jaeger-LeCoultre and the luxury carmaker have spent the past 18 months developing a car key, which is a timepiece whose dial looks likes an Aston Martin dashboard counter. The Amvox2 DBS Transponder watch is made from 18-carat gold and ruthenium. If paying $37,900 for your car key is not gravity-defying, what is?