Irina Fan Senior Economist irinafan@hangseng.com Joanne Yim Chief Economist joanneyim@hangseng.com September 29 Hong Kong Economy: Recovering from Recession? Hong Kong staged a strong rebound in the second quarter, heralding the end of the recession. As the worst seems to be over, we have revised our GDP forecast for 29 to a contraction 4. from a decline of.. Despite the upward revision, we remain cautious about the prospects of a sustained recovery. While the economy might be out of recession, the improvements have mainly been policy-driven. On the domestic front, the good news came from less negative consumption spending, underpinned by tax rebates and other fiscal stimulus. The liquidity-driven asset market rally fuelled by central banks ultra-loose monetary policy also helped lift consumer confidence and market sentiment, but private sector investment showed no improvement. Exports, the territory s major growth driver, remained dismal, plunging 19.9 in July. That may explain why the job market remained lackluster, although government infrastructure projects had eased some pressure in the construction sector, preventing the unemployment rate from surging further. Latest GDP figures from the US and other Asia economies (including mainland China) showed that government-led spending played a crucial role in the recent growth rebound. Data in the coming months should be monitored closely to see whether the private sector could take the baton to lead a full fledged recovery. Exhibit 1: Hong Kong s Economic Forecast ( yoy changes) 28 29F 21F Real GDP 2.4-4. 2. Consumer prices 4.3. 1. Unemployment rate* 3.6.7 6.2 Export value.1-12. 6. Retail sales volume. -6. 4.8 Note: * average for the year; (F) forecast. Sources: Hong Kong s Census and Statistics Department, Hang Seng Bank
A Sharp Rebound in the Second Quarter The Hong Kong economy rebounded strongly in the second quarter, with GDP expanding by 3.3 from the first three months, as both domestic and external demand recovered from their troughs. The year-on-year contraction in GDP also narrowed to 3.8 1 from 7.8 in the first quarter. These are clear signs that local economic activity is bottoming out. yoy Exhibit 2 Exhibit 3 Hong Kong Real GDP Growth 1 1 - -1 97 99 1 3 7 9 1 1 yoy yoy Domestic and External Demand 2 2 1 1 ` - -1 - -1-2 -1-2 97 99 1 3 7 9 2 2 1 1 - -1-1 -2-2 yoy Domestic demand External demand Exhibit 4: GDP Growth Quarterly (yoy ) Annual (yoy ) 3Q8 4Q8 1Q9 2Q9 28 29F 21F Private Consumption -.2-4.1-6. -1. 1. -1.1 -- Government Consumption 1.6 1.8 1.4 1.6 1.7 1.7 -- Gross Domestic Fixed Capital 2.9-17.8-13.7-14. -. -9. -- Formation Export of Goods 1.3-4.9-22.7-12.4 1.9-11.4 -- Export of Services 4.8.4-6.3 -.7 1.8 -.6 -- Import of Goods 2. -6.4-21.4-12.7.7-11.2 -- Import of Services 2.2-3.4-9.6 -.6 3.3 -.3 -- Real GDP 1. -2.6-7.8-3.8 2.4-4. 2. GDP Deflator 2. -.2.4 1.7 1.4.8 1. Nominal GDP 3. -2.8-7.4-2.2 3.8-3.3 3. Source: Census and Statistics Department, Hang Seng Bank As the worst seems to be over, we have revised our GDP forecast for 29 to a contraction 4. from a decline of.. The government has also revised its forecast to a contraction of 3. to 4. from its previous estimate of a fall of. to 6. released three months ago. 1 Changes throughout the report are on year-on-ear basis unless otherwise stated. 2
Despite the upward revision, we remain cautious about the prospects of a sustained recovery. Although the decline of exports eased to 12.4, from 22.7 in the first quarter, the contribution to growth was due to a more severe contraction of imports of goods and services. On the domestic front, private sector had yet made any contribution to growth. While the drop in consumption spending decelerated to 1. from 6 in the first quarter, investment spending showed no improvement, declining at a similar rate of 14 in the second quarter. Latest GDP figures from the US and other Asia economies (including mainland China) showed that government-led spending played a crucial role in the recent growth rebound, while the traditional growth drivers, including consumer and investment spending, remained sluggish. Unless private sector demand rebounds, the global and local economic recovery will likely be slow and gradual. Exhibit yoy Mainland China South Korea Singapore US# 1Q9 2Q9 1Q9 2Q9 1Q9 2Q9 1Q9 2Q9 Private consumption 8.9* 6.8* -4.4-1.1-4.2-3.7.6-1. Government spending -- -- 7.3 7. -1.7 6.3-2.6 6.4 Investment 4.6** 23.4** -24. -2.6-1.1-7.2 -. -24.4 Exports of goods -18.1-19.1-1.6-4.3-21.1-1.7-36.9-7. Real GDP 6.1 7.9-4.2-2. -9. -3. -6.4-1.6 Note: * household plus government consumption; **private plus public investment; # quarter-on-quarter annualized rates. Sources: Bloomberg, Hang Seng Bank, US Bureau of Economic Analysis Retail Sales Continue to Drop Retail sales continued to decline for the sixth consecutive month in July, dropping. in value and.4 in volume, as consumer demand stayed weak. Retailers had to live with squeezed profit margins due to their lack of bargaining power. The retail price, as indicated by the gap between value and volume growth, has remained in negative territory since June, indicating price cuts. Looking ahead, retail business is unlikely to revert to an uptrend in the near term, as the unemployment rate hovers near three-and-a-half-year highs and household income continues to fall. Retailers may not be able to count on tourist spending either. Airlines and hotels are still offering deep discounts on deteriorating load factor and low occupancy. While the worst may be over, we still see retail business contract 6 for the full year of 29. 3
Exhibit 6: Hong Kong Retail Sales Volume () Jun9 Jul 9 All retail outlet -4.1 -.4 Food, alcoholic drinks & tobacco -1. 1.1 Supermarket 1.2 -. Fuel 2.7 4.9 Clothing & footwear -9.6-8.4 Consumer durables -4.8-9.4 Department stores -6.4-8.4 Jewellery, watches, clocks & valuable gifts -8.1 2. Other consumer goods -1.7-8.7 Source: Hong Kong s Census and Statistics Department Exhibit 7 Exhibit 8 Tourist Arrivals and Retail Sales 3 2 yoy 3 2 2 1 1 - -1 2 1 1 - -1-1 yoy -1-2 6 7 8 9 Retail Sales Value Visitors arrivals Exports Fell at a Faster Pace Hong Kong s total exports slipped 19.9 in July, continuing with the trend of doubledigit declines, after improving to single-digit decline in the previous month. Trade figures are likely to be volatile in the second half due largely to the base effects of production suspension and infrastructure bottleneck as a result of the Beijing Olympic Games which took place in August 28. Going forward, exporters are still struggling to sell to US and European consumers, but the worst should be over. Consumer spending remained sluggish, as only those with jobs could afford to spend, but consumer confidence had been improving on the back of a sharp rally in the global stock market over the past months. As such, we adhere to our forecast of 12 contraction in total exports for the full year of 29, implying an average decline of 4 in the coming four months. 4
Exhibit 9: Hong Kong Trade Statistics Jun9 Jul9 Total exports -.4-19.9 Domestic exports -38.7-41.3 Re-exports -4.2-19.2 Imports -7.9-17.8 Source: Hong Kong s Census and Statistics Department Exhibit 1 Exhibit 11 yoy Hong Kong Total Exports (3MMA) 2 2 2 2 1 1 1 1 - - -1-1 -1-1 -2-2 -2-2 97 98 99 1 2 3 4 6 7 8 9 yoy yoy Total Exports to Major Markets (3MMA) 4 4 3 3 2 2 1 1-1 -1-2 -2-3 -3 97 99 1 3 7 9 Value of total exports US China yoy Unemployment Rate Stays High The unemployment rate stayed at a three-and-a-half year high of.4 in July. Employers seemed to have stopped cutting jobs, with total employment dropping by a mere 9. Nevertheless, the number of unemployed continued to rise, breaking 21,. The unemployment rate rose at a slower-than-expected pace in the last few months, as government infrastructure projects and employment programmes helped ease some pressure in the construction sector, but the momentum of job creation in private sectors remained lack-lustre. The recent improvement in economic condition was primarily due to government stimulus, the private sector had yet made any contribution to the recovery. Companies are still under great challenges to resume profit growth, even though business may not be as bad as earlier this year, clouding the employment prospects. As such, we believe the unemployment rate is unlikely to have peaked. The rate may climb to over 6 by year-end to give an average of.7 for the full year.
Exhibit 12 Exhibit 13 14 12 1 8 6 4 2 Unemployment Rate (Selected Industries) 14 12 1 8 6 4 2 Jan-8 Jul-8 Jan-9 Jul-9 Construction Trade Transport Financing Insurance Exhibit 14: Unemployment Rate (Major Industry) Import & export trade Professional & business services Retail Transport & storage Oct 8 2.7 2.7.2 3.4 Nov 8 3. 2.6.7 3.6 Dec 8 3.3 2..3 3.8 Jan 9 3.9 3.. 4. Feb 9 4.3 3.2.4.3 Mar 9 4.6 3.7 6. 6. Apr 9 4.8 3.9 6.1.8 May9 4.8 4.2 6.2.4 Jun9 4.9 4.3 6. 4.9 Deeper Deflation Consumer prices contracted 1. in July, after falling.9 in June, as the government s one-off relief measures and weak demand were both working toward this direction. Netting out the impact of the special effects from government s oneoff measures, the underlying inflation rate was -.3. Consumer prices are likely to continue coming under pressure, as consumers will remain cautious in spending amidst mounting job losses. The recent GDP figures from the US, mainland China and other Asian economies indicate that the sharp rebound reflects the result of government efforts, consumers are unable to play a leading role in the recovery. The situation in Hong Kong is similar. In our view, deflationary risks are still high in the near-term, until a genuine and sustainable recovery takes hold, businesses will be unable to make a profit and could cut production and lay off more workers, causing a deflationary spiral. 6
But the flood of liquidity generated by central banks and governments expansionary policy would provide a buffer against a free fall in prices. We believe the local inflation rate is likely to hover at around zero for some time. yoy Exhibit 1 CPI Inflation 8 6 4 2-2 -4-6 -8 97 98 99 1 2 3 4 6 7 8 9 8 6 4 2-2 -4-6 -8 yoy Exhibit 16: Hong Kong Composite CPI Component, yoy Jun9 Jul9 All items -.9-1. Food.4 -.6 Meals bought away 1.3.8 from home Exclude meals bought -.8-2.6 away from home Housing 3.7 2.7 Electricity, gas & water -42. -42.3 Alcoholic drinks 22. 22.8 & tobacco Clothing & footwear 1.3 1.3 Durable goods -3.6-3.4 Miscellaneous goods 2.1 1. Transport -1.6-2.3 Miscellaneous services -3.8-3.8 Source: Hong Kong s Census and Statistics Department 7
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Index 1999=1 9
Hong Kong Economic Monitor Statistics September 29 GDP (real) Real GDP per capita Retail sales (real) Total Deposits Total Loans Money supply (Total M3) Consumer prices Unemployment rate (s.a.) yoy() yoy() yoy() HKD bn yoy() HKD bn yoy() yoy() yoy() 22 1.8 1.4-2.6 3,318-2.6 2,76 -. -.9-3. 7.3 23 3. 3.2 -.6 3,67 7. 2,3-2. 8.3-2.6 7.9 24 8. 7.6 9.1 3,866 8.4 2,16.9 8.6 -.4 6.8 2 7.1 6.6 6.1 4,68.2 2,312 7.3.2 1..6 26 7. 6.3.8 4,77 17. 2,468 6.7 1. 2. 4.8 27 6.4.3 1.1,869 23.4 2,962 2. 2.6 2. 4. 28 2.4 1.6. 6,6 3.2 3,284 1.9 2.6 4.3 3.6 29F -4. NA -6. 6,714 1.8 3,113 -.2 1...7 21F 2. NA 4.8 7,372 9.8 3,27.2 9.3 1. 6.2 Q4 27 6.6 NA 13.,869 23.4 2,962 2. 2.6 3. 3.6 Q1 28 7.3 NA 11.6,762 1.9 3,17 18.7 13. 4.6 3.4 Q2 4.1 NA 7.,76 7.1 3,349 17.1.7.7 3.3 Q3 1. NA 4.1,847 2.7 3,42 12.6 1.9 4.6 3.4 Q4-2.6 NA -2. 6,6 3.2 3,284 1.9 2.6 2.3 4.1 Q1 29-7.8 NA -. 6,22 4. 3,166 -.1 2.6 1.7.2 Q2-3.8 NA -.4 6,724 1. 3,23-4.3 9.6 -.1.4 Mar 29 NA NA -9.2 6,22 4. 3,166 -.1 4.2 1.2.2 Apr NA NA -. 6,43 4.6 3,1-2.2 4.3.6.3 May NA NA -6.2 6,166 7.6 3,17-3.7 7.2..3 Jun NA NA -4.7 6,274 1. 3,23-4.3 9.6 -.9.4 Jul NA NA -. 6,28 9.8 3,172-6.8 9.4-1..4 YTD -.8 NA -4.6 6,28 9.8 3,172-6.8 9.4 1.7.4 Exports Foreign Trade Imports Trade Property Price Index Office Rental Index Tourist Arrivals HKD per USD (end of period) balance HK$bn yoy() HK$bn yoy() HK$bn yoy() yoy() ' yoy() 22 1,61.4 1,619 3.3-8.9-11.1-1.4 16,66 2.7 7.798 23 1,742 11.7 1,86 11. -63.3-12. -12.7 1,37-6.2 7.763 24 2,19 1.9 2,111 16.9-92. 26.7 4.6 21,811 4.4 7.774 2 2,2 11.4 2,33 1.3-79.3 18. 23. 23,39 7.1 7.73 26 2,461 9.4 2,6 11.6-138.8.7 21.2 2,21 8.1 7.77 27 2,688 9.2 2,868 1.3-18. 11.6 12.1 28,169 11.6 7.81 28 2,824.1 3,2. -21.1 16.4 17.9 29, 4.7 7.7 29F 2,48-12. 2,638-12.8-12.7-8. -13.9 28,763-2. 7.8 21F 2,634 6. 2,84 6.3-169.8 2. 3.2 31,123. 7.8 Q4 27 729 8.2 781 1. -2. 21.4 14. 7,86 16.9 7.81 Q1 28 698 1. 647 11.6-1.4 29. 16.1 7,276 1. 7.781 Q2 76 7.9 773 9.2-67.6 2.6 21.1 6,91 7.7 7.818 Q3 89. 76 6.8-48.4 18. 2.8 7,83 3.4 7.763 Q4 714-2.1 748-4.2-34.2-4.6 13.7 7,722-1.1 7.7 Q1 29-21.9 39-22.8-34.3-13.6-2.4 7,44 1.8 7.71 Q2 61-12.9 68-14.9-43.7-7.2-1.6 6,293-8.9 7.71 Mar 29 17-21.1 194-22.7-18.2-13.6-7.2 2,44 1.7 7.71 Apr 199-18.2 21-17. -16.4-9.1-12.1 2,439.8 7.71 May 24-14. 21-19.2-11. -7.8-17.1 2,28-13.4 7.73 Jun 211 -.4 228-7.9-16. -4.8-17.6 1,826-1. 7.71 Jul 212-19.9 234-17.8-21.7-1.9-18.6 2,378-12.2 7.71 YTD 1,331-17.7 1,43-18. -99.7-9.2-1.6 16,7-3.4 7.71 Note: (F) Forecast Source: CEIC, Hang Seng Bank 1
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