Retail Sector Soldiering On

Take a walk through any of Hong Kong's busy malls or bustling street-side shopping areas and you would hardly think that local retailers are suffering, but appearances can be deceiving.

While it is true that retail volumes have picked up since the short, sharp recession of 1998 and early 1999, with steep price cuts there has not been commensurate improvement in the industry's revenues.

In the first two months of this year (taking the two months together removes the seasonal impact of the moveable Lunar new Year holidays), retail volume improved by a mere one (1) per cent. In terms of value (total revenues) they were actually down by the same percentage amount to $31.6 billion.

This shows the same trend as last year, too, when volumes were up quite reasonably by 8.1 per cent, but value of sales (revenues) rose only 3.8 per cent to $186.7 billion. That leaves them a massive $48.2 billion below their peak of 234.9 billion in the year the East Asian financial crisis hit, 1997.

Put simply, Hong Kong's important retail sector, in the years since the economic downturn, has been gradually pushing more goods of all types through the stores, but is not getting anywhere near the same numbers of dollars through the cash registers it did before the recession hit in late 1997.

The plight of the retailers brings into sharp perspective the two home truths of Hong Kong's economic recovery.

First, it has been accompanied by deflation (a general decline in prices), which means that while "real" (deflation adjusted) growth has been good, nominal or current dollar value growth has been only modest.

Second, the real drivers of growth were, until now, the dramatic recovery in external trade in goods and services, particularly China related re-export growth, and the related build-up in local inventories, along with a modest domestic contribution from investment in machinery and equipment (especially computers).

The retail sector in Hong Kong has clearly not been helped by the enormous destruction of stored wealth that occurred in the SAR as a result of the economic downturn, especially in the property sector, but also the decline and subsequent volatility in equity prices on the local share market.

This reversal in the so-called "wealth effect" (increases in asset values encouraging consumption) has done little for consumer confidence. Even the recovery in the share market to a new peak in the early part of 2000 (and then its subsequent decline) only briefly encouraged consumption in the early months of 2000.

Nor has consumption been encouraged on the income side, with wages being effectively "frozen" throughout 1999 and 2000 and only modest increases being granted this year. Furthermore, these increases were more than offset for many wage earners by the need to contribute to the new Mandatory Provident Fund (MPF).

A further limiting factor has been the high cost of money in the SAR. High nominal interest rates and continuing deflation have meant that real interest rates have remained high despite the 1.5 per cent lopped from deposit rates (cutting earnings for depositors from this source) and lending rates this year.

A big recovery in visitor arrival numbers has also failed to make an impact, as visitors are not spending as they had in earlier tourism booms. Total arrivals last year topped a record 13 million people, but visitor spending was probably only a little over $60 billion, down some $20 billion on the record spending of $82.5 billion in 1996.

The biggest losses in terms of value, or revenue, in the opening two months of this year appeared to be at the high end of the market. Department stores saw sales down 6.7 per cent or $220 million on last year and sales of jewellery, watches and clocks and valuable gifts were down 9.6 per cent or $410 million..

Sales of clothing, footwear and allied products were also down 3.7 per cent or $160 million and fuels by 3.9 per cent, or some $60 million less than the same two months last year.

The biggest improvement, hardly surprising at a time of New Year celebrations, was in revenues from sales of food, alcoholic drinks and tobacco, with a 5.8 per cent increase. That added $210 million to the take compared with last year. Most other sales categories were flat, at least in dollar value terms.

For further information, contact Ian K Perkin on 2823-1242.