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Economic Update

2016/04/06

As economic activities slow, labour demand flattens

Hong Kong’s economic momentum remained lacklustre in the first couple months of this year, with the usual indicators extending their respective streaks of year-on-year decline. While strong domestic demand has carried Hong Kong through some headwinds over the years (see Chart 1), with retail sales slowing down at a much accelerated pace, it could be a hint that domestic consumption’s contribution to growth may no longer be as robust in 2016. As such, the evolving trends of Hong Kong’s domestic sectors and their implication on the labour market must be monitored carefully.

 

Provisional retail sales in February declined drastically by 20.6%YoY (see Chart 2). Even if we net off possible seasonal effects of Chinese New Year by looking into the value of total retail sales during the first two months of 2016, this figure is still down 13.6%YoY. A marked decline of such magnitude would take a toll on the already-weakening consumer sentiment, which was also hurt by the decline of visitor arrivals (-20.5%YoY in February). These trends will likely continue to have a negative impact on employment demand, particularly in the retail and tourism-related sectors, which we have warned earlier (click here).

With global merchandise trade down 11.7% in January, the weakening international trade continued to weigh on Hong Kong’s economy in the first two months of 2016. Aggregate two-way trade flows shrank 8.1%YoY during those two months, largely dragged down by the less dynamic trade activities with China (-9.5%YoY) (see Chart 3). The continuation of weak international trade will likely dampen the employment situation in the import and export trade sector, which currently employs around 427,100 people, compared to its peak in February 2009 when the sector employed some 555,600 people.

As the affected sectors have already been facing pressure during an extended period, the labour market could face added pressure going forward. While the headline unemployment rate remained at 3.3% in February, the unemployment rate of the retail, food service and accommodation category was 4.6%, and the number of employees dropped by around 15,000 compared to a year ago as of January. The cyclical weakness could potentially lead to dismissal of workers in these sectors during the first half of the year – particularly as dismissals and layoffs tend to happen during the first half of the year (see Chart 4).

In the recently released Half-yearly Monetary and Financial Stability Report, the Hong Kong Monetary Authority suggested that economic growth would remain flat in the first half of this year. Among the other risks, the report highlighted those related to further US interest rate adjustments, as well as development of financial and monetary conditions in the Mainland and any “sharper-than-expected adjustments in the property market,” which could represent further downside risk to the local economy (p. 38).

To conclude, Hong Kong’s economic growth has come largely from domestic demand as a result of the strength of the employment market, but weaknesses in the retail and trade sectors would likely weigh on labour demand, which is in line with the conservativeness in the business community. From informal conversations, there is little sign of optimism among business leaders and executives across different sectors, and this is alerting us of the potential of further headwinds.

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