Hong Kong retailers have been under some pressure this year but as we approach the holiday season, will things be looking upwards for them? Recent data does not seem to be too supportive. Apathetic Inbound Tourism Continued to Hurt Retailers After seeing a slight moderation in July, the headwinds returned and shattered hopes of retail sales stabilising as visitor arrivals dropped markedly in August (see Chart 1).
Visitor arrivals declined by 9.4% YoY in August, a significant reversal of a 2.6% YoY growth in the previous month. Numerically speaking, this was very much related to the momentous decline (11.3% YoY) in Mainland Chinese visitors – which accounted for 79.4% of total visitors in August – compared to the 2.2% YoY increase in July.
Although some have argued that the decline in visitor arrivals was a result of the Olympics (i.e. people chose to stay home to watch the Games), we do not subscribe to this argument because other places in the region received notably more Mainland Chinese tourists in the same month compared to a year ago (see Table 1). We believe the reason is that other economies have been introducing more initiatives to attract Mainland visitors.
Partly due to the weak tourism performance mentioned above, total retail sales extended its year-on-year decline streak to 18 months and tumbled 10.5% YoY in August. For the first eight months of 2016, total retail sales value dropped 10.2% YoY.
Looking ahead, even though we think that a lower statistical base could lead to softening pressure on the year-on-year performance and Hong Kong should remain a major tourist destination for Mainland Chinese, Table 1 shows that neighbouring economies are catching up quickly. At the same time, despite pessimism among domestic consumers being remarkably less drastic (see Chart 2), the year-on-year decline in the Index of Consumer Confidence reached four consecutive quarters, marking its worst performance since 2010-2012. Therefore, without any positive developments with incoming tourism, retail sales performance would likely remain weak through the rest of the year.
Pressure on businesses on the rise
We expect the outlook for retail businesses to remain bleak in the near term. In its latest World Economic Outlook, the IMF cut Hong Kong’s growth rates for 2016 and 2017 to 1.4% (from 2.2% in April) and 1.9% (from 2.4% in April) respectively, signifying their concern that local businesses might have difficulty regaining growth. At the same time, costs could be on the rise. Particularly, since the Minimum Wage Commission has reportedly reached a consensus on 7 October to raise the statutory minimum wage to HK$34.50 per hour from the current rate of HK$32.50 (+6.2%), some upward wage pressure would be channelled to the upper echelon through the so-called ripple effect and other non-wage remunerations.
These factors combined – and other things being equal – should imply that businesses could face mounting pressure in the near term.
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