Economic Insights
Dark Clouds Linger
Dark Clouds Linger<br/>陰霾密布

With both domestic and external demand weakening, Hong Kong’s GDP growth eased to a near-decade low of 0.6% year-on-year in the first quarter of 2019, down from 4.6% a year earlier. Growth in private consumption slowed further to 0.2%, a level last seen in the second quarter of 2016. Despite the fact that the economy did rebound on a quarterly basis to avoid a technical recession – which is conventionally defined as two consecutive quarters of negative growth – few would be confident enough to say that the dark clouds have passed and the sun will be out soon. 

Advance estimates on the city’s GDP for the second quarter will be released on 31 July. Data available suggest that the picture has remained gloomy in the face of the lingering China-U.S. trade war and the political tensions in the territory sparked by the controversial extradition bill. The monthly Nikkei Purchasing Managers’ Index (PMI) of Hong Kong, which gauges the performance of the private sector’s business activity, stood at 47.9 in June. That marked the 15thconsecutive month with a PMI reading below the critical 50 mark, which separates a month-on-month expansion in activity from a contraction. 

Total merchandise exports have registered a year-on-year decline for the seventh straight month since November. Re-exports, which account for virtually all exports from the city, naturally replicate this downward trend. As for re-exports originating in Mainland China and heading for the United States, their value has dropped for sixth straight month since December, partly owing to the after-effects of front-loading earlier to avoid higher tariffs (Figure 1). 

In 2018, Hong Kong International Airport (HKIA) handled 5.1 million tonnes of total cargo throughput, which accounted for 42%, or HK$3.71 trillion, of the total value of Hong Kong’s external trade. Such high volumes have made HKIA the world’s busiest airport for nine consecutive years since 2010, according to the Airports Council International, an association of the world’s airports. However, commercial cargo volume handled by HKIA declined by 8.3% in April and 7.5% in May. In the 12-month period from June 2018 to May 2019, it dropped 2.7% compared to the same period a year earlier. 

The Hong Kong Trade Development Council has already slashed its forecast for the city’s export growth this year, from 5% to 2%. If the prediction is correct, it would be the slowest growth in three years, which is down sharply from 7.3% in 2018. The weakness in our external sector is likely to continue in the second half of the year. This is not only because of the global economic slowdown and continuous disruptions in trade activities, but also as a result of the front-loading activities in the second half of 2018. Accordingly, the figures in the second half of this year will be comparing to an upwardly distorted base.

As to the flow of people, which is important to the city’s tourism and retail sectors, total visitor arrivals, which reached a record high of 65.1 million last year, have continued to grow. This has been due to the launch of new infrastructure such as the Express Rail Link (XRL) and Hong Kong-Zhuhai-Macao Bridge. Mainland visitors, who accounted for about 77% of the total, rose by 5.3% year-on-year in April, but we should be aware of their changing composition. 

As the planned one- and two-hour living circles within the Greater Bay Area have become increasingly achievable, the proportion of Mainland day-trippers rose from 46% a decade ago to 62% in April this year, while that of overnight visitors dropped from 54% to 38% (Figure 2). The fact that day-trippers normally spend much less than overnight visitors might partly explain why the retail sector has not benefited recently as much as in the past (Figure 3). 

In the meantime, per capita spending of Mainland overnight tourists, whose trend largely follows the value of the RMB, peaked in 2013 (Figure 4). 

Overnight tourists from the Mainland are also spending less on shopping, but more in categories such as accommodation and restaurants (Figure 5). 

In April, retail sales were down 4.5% year-on-year, following the 1.2% contraction for the first three months of the year. The value of sales of jewellery, watches and clocks, and valuable gifts – a yardstick for spending by Mainland tourists that contributes one-sixth of total retail sales in the city – declined 11.4%. 

For now, the direct impact of the trade war on our real economy has been limited, as re-exports directly affected by the additional tariffs account for only 4% to 5% of the total re-exports of Hong Kong. However, the dispute-related uncertainty has affected us indirectly through asset market corrections and major investment delays, which are going to put more and more pressure on our real economy. 

On the bright side, the labour market remains very tight with an unemployment rate of 2.8%, underpinning private consumption to a certain extent. However, we should not take this for granted, as our economy would need to keep growing for the unemployment rate to remain low. As such, it is time for us to put more emphasis on the economy and work together to secure a long-term stable and sustainable business environment, after spending much time and attention on the extradition law that has triggered huge controversy over the past few months.

Wilson Chong is the Chamber’s Senior Economist. He can be reached at wilson@chamber.org.hk

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