Consumers benefiting from endless sales and promotions as retailers try to survive

Barely had the Hong Kong's traditional summer retail sales ended than many stores in the SAR's major shopping districts had signs out declaring "between season" sales and offering big discounts on their merchandise.

While not true of the big retailers, who tend to stick fairly rigidly to the traditional sales programme, it was certainly the case for smaller groups, chain stores and boutiques, who need to react quickly to market conditions and the competition.

This may be difficult to understand given the publicity afforded the recovery in the local economy, but it does serve to underline the uneven nature of the retail recovery during the emergence from the recent recession.

It also highlights the fact that in the shadow of the recession it is still difficult to encourage consumers to part with their money in Hong Kong, especially with no wage increases for two years, lower property prices and higher interest rates.

Even the recovery in the share market has not helped much.

Some people have suggested that another negative factor has been the increasing tendency for some people to shop across the border in Shenzhen, but this is unlikely to have had a major impact on local sales.

First, purchases across the border would not be that large in the overall scheme of things and, second, latest numbers show Hong Kong people in total spending less overseas (including China) this year than in the recent past.

The continued weakness in retail sales is, therefore, more likely to be due to the domestic factors, including the lack of consumer confidence after the recession brought on by tight wages and continuing deflation.

An examination of the historic figures shows that Hong Kong's retail sales peaked in the boom years of 1996 and 1997 and that they have barely shown any recovery since the Asian financial crisis hit in the final quarter of 1997.

There is nothing really surprising in this. Until the financial crisis hit, confidence in the local economy was running high across all sectors.

Wages were increasing in both nominal and real terms, meaning people had more to spend and, because they were confident in the future, were prepared to spend.

Property prices had risen spectacularly making people feel wealthier and therefore more likely to spend on a wide range of goods and services.

At the same time, the stock market was heading ever-higher, again encouraging the positive "wealth effect" and making people more likely to consume.

Visitor arrivals and tourism spending in Hong Kong also peaked in the years 1996 and 1997. Employment was high.

The recovery of the past 12 months, extending from the final quarter of 1999, has done little to lift spending of the retail level, with all the positives of previous years working in reverse.

Retail sales are certainly higher, in "real" terms, that is the volume of goods sold, but because of deflation (lower retail prices across a wide range of goods), the cash flow of the retail sector has remained tight.

Total retail sales in 1996 were HK$223.9 billion (or HK$18.7 billion a month on average) and increased to a peak HK$234.9 billion in 1997 (an average of almost HK$19.6 billion a month).

In 1998, as the financial crisis began to hit the economy, they fell dramatically to HK$195.7 billion (on HK$16.3 billion a month) as consumers cut back their spending in the face of recession.

The following year (1999), retail sales fell even further to HK$179.9 billion (or around HK$15 billion a month). This was the lowest annual level for retail sales since 1993.

So far this year sales have recovered slightly to HK$125.1 billion in the first eight months of the year (an average of HK$15.6 billion a month), compared with HK$119.5 billion in the same period last year (HK$14.9 billion a month).

The improvement in sales has, however, been uneven with a significant improvement in sales of consumer durables, including motor vehicles in the first half of the year, and furniture, being out weighed by weaknesses in other areas.

This continued weakness in retail sales has also been reflected in overall consumption, as measured by the gross domestic product (GDP) figures.

Although overall GDP grew by 14.3 per cent in real terms in the first quarter of this year and 10.8 per cent in the second, private consumption rose only a real 8.8 per cent in the first quarter and 5.2 per cent in the second.

But that is after taking account of deflation (an overall decline in prices). In nominal, or cash terms, private consumption was up only 2.3 per cent in the first quarter and showed no increase at all in the second.

Again, the biggest increases were in consumer goods, especially consumer durables (including cars), but even demand for these fell away in the second quarter of the year.

Fortunately, tourist spending began to pick up in the second quarter of the year and there could be further improvement as the year progresses.

Looked at in a broader perspective, however, the SAR's retail sector has recovered only slowly from the recession of 1998 and early 1999.