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Economic Update

2019/04/03

Retail Sales Growth Remains Weak

Hong Kong’s retail sales dropped 10.1% year-on-year in February after a 7% growth in January, according to provisional figures.

As the individual monthly performance of the retail sector in the first two months of the year tends to be volatile due to the difference in timing of the Lunar New Year holidays, we take January and February as a whole to remove that distortionary effect.

For the first two months of 2019 taken together, the total value of retail sales dropped by 1.6% compared to the same period last year.

In fact, the decline should not surprise market watchers, as the retail performance of the city has trended downward since mid-2018 (Figure 1). This is despite buoyant inbound tourism thanks to the launch of the major transport links between Hong Kong and Mainland China.

Growth in retail sales dropped from double digits in June to merely 0.1% in December 2018.

In the first two months of 2019, the value of sales of jewellery, watches and clocks, and valuable gifts – a yardstick for spending by Mainland tourists and accounting for one-fifth of total retail sales in Hong Kong – decreased by 2.8%.

During the same period, the value of sales of clothing and footwear dropped by 2.9%, partly due to the unusually mild weather -- the last thing that clothing stores needed in winter.

The March retail figures are unlikely to post a meaningful rebound. One of the main reasons is the weakness of the RMB, which would have weighed on Mainland visitors’ purchasing power. Compared to a year earlier, the RMB has lost 7% against the U.S. dollar.

The good news for Hong Kong is the dovish turn of the Federal Reserve, which decided to keep the target range for the federal funds rate at 2.25-2.5% at its March meeting, and signaled that there would be no rate hikes for the rest of 2019.

Two major risks identified for the Hong Kong economy this year are the China-U.S. trade war and the normalization of interest rates. For now, the trade tensions are still lingering. However, the latest decision of the Fed and, consequently, a likely delay of the normalization cycle for local interest rates, should give Hong Kong’s economy some timely breathing space.

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