By Ian K Perkin

In the three years since the Asian financial crisis hit the Hong Kong SAR, annual retail sales have been running anything between HK$40 billion and HK$55 billion below their all time record level of nearly HK$235 billion achieved in 1997.

Official figures issued by the government last month showed retail sales coming in at HK$187 billion (US$24 billion) last year, up a modest 4 per cent in value terms on total sales of HK$180 billion in 1999.

That still leaves them some HK$48 billion below the 1997 record. Moreover the HK$235 billion in sales achieved by the retail sector in the handover year occurred despite the onset of the financial crisis in late October of that year.

Volume of sales did a little better than value last year, being 8 per cent higher, but this merely serves to highlight the pricing pressures retailers were under, having to offer good discounts to keep customers in their stores.

Looked at from the perspective of recent history, even retail volumes are still below the peak level achieved in 1997.

Given the solid improvement in the macro-economic picture, with 10 per cent growth in real terms and around four per cent in nominal (current dollar value) terms, the retail outcome for the 12 months was disappointing, if not unexpected.

Santa Claus did help stores a little in December, with retail sales value for what is normally one of the best months of the year coming in at HK$16.7 billion, up just 1 per cent in value terms, but a modest 3 per cent in terms of volume.

All this suggests retailers are set for another challenging year ahead despite the apparent recovery in the economy and the clear trend towards substantially lower interest rates established in the opening weeks of the new year.

There will be modest wage rises for Hong Kong employees this year, which would normally boost retail sales, but this year will be offset by the 5 per cent of salary contributions to the new Mandatory Provident Fund (MPF).

Tourists are also not helping much. A record number of them came to the SAR last year, but they kept tight control on their purse strings. At the same time, Hong Kong residents were intent on retail spending on the Mainland, especially in Shenzhen.

Weak property prices and flat share market also did little to boost retail sentiment in 2000. None of these factors are likely to change much this year, although with deflation disappearing retailers might have some more pricing flexibility.

On the cost side, they will also be helped by likely rental restraint by landlords (although this will depend on the retail district) and the continued control of wage costs (although the employers' MPF contribution will be an increased cost).

The year 2000 outcome shows that most retailers were clearly faced with discounting shelf prices -- and extending their normal sales' periods -- to encourage consumers and lift the revenue and cash flow of their businesses, if not their underlying profits.

Given this sort of picture, it was surprising to see the relatively positive remarks made by some analysts on the retail picture, especially when the local retail sector has languished since the east Asian financial crisis hit in the second half of 1997.

Some even suggested that the picture was improving at year's end when the figures clearly showed otherwise and even the government's spokesman on the issue grudgingly had to admit that the pace of growth had slowed in the final six months.

In fact, the seasonally adjusted three month moving average of retail sales even in volume terms revealed sales down 2.1 per cent in the December quarter of last year compared with the average for the November three months.

Furthermore, the negative three month moving averages in terms of volume are evident throughout the second half of last year compared with the quite strongly positive figures for the opening half of the year.

While total sales of $187 billion last year were up on 1999's HK$180 billion, they still compare badly with immediately previous years -- HK$196 billion in 1998 (a recession year), HK$235 billion in 1997, HK$224 billion in 1995 and HK$201 billion in 1994.

Put in average monthly terms, retail sales in Hong Kong peaked at an average HK$19.6 billion a month in the handover year of 1997 (HK$19.3 billion a month in the first half of that year) and are currently running at HK$15.6 billion.