Irina Fan Senior Economist irinafan@hangseng.com Joanne Yim Chief Economist joanneyim@hangseng.com May 28 Hong Kong Economic Update Hong Kong s March export growth stayed low at 7.6 yoy, as exports to the mainland showed no growth. Taking the first three months together, however, total exports still grew strongly by.9 yoy. Despite the fact that the US economy is at risk of slipping into recession, Hong Kong s exports were underpinned by steady demand in the EU and Asia. Looking ahead, with the stagnant US market having already dragged down Mainland s export growth to 21.3 yoy in 1Q8, from 25.7 in 27, it would be difficult for Hong Kong s exports to maintain its impressive performance. On the domestic front, the labour market remained relatively tight, but has been lackluster in adding new jobs. The March unemployment rate edged up to 3.4, from 3.3 in February, due to a drop in total employment. The momentum of job creation looks set to slow as signs of cooling demand become more apparent. The trade sector was the first to feel the pain and the heightened risk in the global credit market also impaired worker demand from the local financial services sector. Domestic demand remained supported by rising wages with March retail sales growing 2.2 yoy in value and 13. in volume. However, the upside surprise was mainly due to rising prices as the gap between the value and volume growth widened from four to five percentage points in the last few months to seven percentage points in March on elevated food and energy prices. March CPI inflation eased to 4.2 yoy, from 6.3 in February, due to property rates concessions. Taking out this factor, the underlying inflation crept up to 5.3 from 5.1 in the previous month on high food prices. The inflation spike is likely to have peaked, but the pace of easing will depend on how fast food supply can re-adjust. At this stage, we still see a relative mild inflation rate of 3.5 for the full-year of 28, as signs of cooling demand are becoming more apparent. Nevertheless, the elevated global food and energy prices pose upside risk to inflation.
Retail Sales Value Inflated by Soaring Prices March retail sales figures were impressive, surging 2.2 yoy in value and 13. in volume. The sales volume indicates consumer spending stay robust, but the upside surprise in the value of sales was due largely to rising prices. The gap between the value and volume growth widened from four to five percentage points in the last few months to seven percentage point in March on elevated food and energy prices, similar to trends discerned in the CPI readings. While the volume growth of food sales was stagnant, its sales value climbed 15.6. Fuel volume rose 4.7, the value was inflated to a 26.7 growth. Looking ahead, retail sales are likely to stay strong in the near term, as consumer confidence is underpinned by rising wages and good employment prospects. The March unemployment rate, even though it edged up slightly to 3.4, remained at a -year low. Latest survey also indicates that salary increases in 1Q8 were larger than that in 4Q7. Nevertheless, signs of cooling demand are becoming more apparent, as can be seen in the latest export figures. Retail sales growth is likely to decelerate gradually in line with the slower momentum of the economy. For the year as a whole, we still expect a decent growth of 14.7 for retail sales in value terms, but creeping retail prices also imply that growth in real term may be less impressive. Exhibit 1 : Hong Kong Retail Sales (Mar8) Exhibit 2 Value Volume All retail outlet tobacco +2. +13. Food, alcoholic drinks & +15.6 +.7 7.5 5. Supermarket +13.7 +4.9 Fuel +26.7 +4.7 2.5 clocks & valuable gifts Clothing & footwear Department stores +21.8 +16.3 +18.2 +11.5 Consumer durables Jewellery, watches, +18.3 +3.9 +21.6 +.7. -2.5-5. Other consumer goods +19.8 +15.7 Source: Census and Statistics Department -7.5 -. Hong Kong Retail Prices 98 99 1 2 3 4 5 6 7 8 7.5 5. 2.5. -2.5-5. -7.5 -. Source: Reuters EcoWin 2
Exports Below Expectations Hong Kong s March export growth stayed low at 7.6 yoy, as exports to the mainland showed no growth. Exports to the US were surprisingly strong, up.5, whereas shipments to our Asian neighbours slowed. Monthly data tend to be volatile. Taking the first three months together, total export growth rose.9 yoy, faster than the 8.2 growth recorded in the 4Q7. Thus far, consumers in the EU and Asia have been able to make up for waning demand in the US. However, it is highly uncertain that the strong trade growth with the rest of the world can be sustained amid a sharp slowdown in the US, as a substantial part of intra-regional trade involves shipments finally targeting the US and European markets. The latest data point to softening economic activities in the euro zone. Mainland s export growth has already eased to 21.3 yoy in 1Q8, from 25.7 in 27 dragged by a stagnant US market, which may be an early warning. We believe Hong Kong cannot opt for a different path. We keep our view that total export growth in 28 is to slow to 7.2 yoy, from 9.2 in 27. Exhibit 3 : Hong Kong Trade Statistics Exhibit 4 Mar8 Feb8 Total exports (HKD bn) 223 184 Domestic exports 7 6 Re-exports 215 178 25 Imports (HKD bn) 521 2 2 Total exports (yoy ) 7.6 7.6 Domestic exports -1. 1.1 Re-exports 7.9 7.8 Imports (yoy ) 6.6 11.9 Source: Census and Statistics Department yoy 15 5-5 - -15 Mainland and Hong Kong Exports to the US - -2-2 94 96 98 2 4 6 8 Hong Kong (3MMA) Mainland(3MMA) 5 4 3 2 yoy Source: CEIC 3
Higher Unemployment Rate on Job Cuts Hong Kong s unemployment rate edged up slightly to 3.4 from 3.3 in the pervious month. Higher unemployment rates were mainly observed in the decoration and maintenance, communications and restaurants sectors. While labour market conditions remain relatively tight, but the sector has been slow in adding new jobs. Total employment declined 6,4 in March after a drop of,2 in the previous month. The figures might be affected by seasonal factors associated with the Lunar New Year festivals, as there is often job cut after the festival. The momentum of job creation looks set to slow as signs of cooling demand are more apparent. The trade sector was the first to feel the pain of waning global demand and has been lack-lustre in adding new jobs for months. The heightened risk in the global credit market and the recent corrections of local stock market also impaired demand for workers from the financial services sector, which has been one of the major drivers for creating new jobs in recent months. Job opportunities will probably come mainly from the retail and hotel sector, as domestic spending remains strong and tourist numbers are also on the rise. Overall, we see unemployment rate bottom out and will continue to rise in a gradual manner in coming months to reach an average of 3.8 for the full-year of 28. Exhibit 5 Unemployment Rate & Job Creation 5.5 3 25 5. 2 6 4.5 15 4. 5 3.5-5 3. - 2.5-15 6 7 8 (') New employment Unemployment rate (s.a.) Source: CEIC Exhibit 6: Hong Kong Source of Job Creation Overall Import & export trades May 7 13, 14, Jun 7 9,9 9,5 Jul 7 9,2 5,3 Aug 7 9,2-2,9 Sep 7-1,2-6,9 Oct 7-6,8-8, Nov 7 12,2-3,3 Dec 7 25,7 3,9 Jan 8 17,2 - Feb8 -,2-5 Mar8-6,4 n.a. Source: CEIC, Census and Statistics Department 4
Subdued Inflation on Property Rate Concession March consumer price inflation eased to 4.2, from 6.3 in the previous month. Again, the one-off property rate concession for 1Q8 continued to have the impact of lowering headline CPI readings in March. Taking out this factor, the underlying inflation rate crept up to 5.3 against a rate of 5.1 in February. The upsurge of food prices remained the main culprit. Food prices (excluding meals bought away from home) soared 17.2 yoy in March, slightly lower than the 19.5 surge in the previous month. The food price sub-index also seems to have stabilized. Nevertheless, the CPI readings are likely to stay high in coming months, as food prices will only ease slowly on elevated global agriculture prices and the extended food supply adjustment time after the Mainland snowstorms. Rising global oil prices also exerted upward pressure on local utilities prices, which have been rising at around 7 for three consecutive months. The inflation spike is likely to have peaked in February. But the pace of easing will depend on how fast food supply can re-adjust. At this stage, we still see a relatively mild inflation rate of 3.5 for the full-year of 28, as signs of cooling demand are becoming more apparent, which is likely to put a dent on inflationary pressure. Nevertheless, the elevated global food and energy prices pose upside risk to inflationk. Exhibit 7 Exhibit 8: Hong Kong Composite CPI Component, yoy Mar8 Feb8 All items 4.2 6.3 Food.2.8 Meals bought away from 5.9 5.5 home Exclude meals bought 17.2 19.5 away from home Housing 1.9 9.2 Electricity, gas & water 7.1 7.4 Alcoholic drinks & tobacco.4.9 Clothing & footwear 3..6 Durable goods -3.5-3.7 Miscellaneous goods 5.5 4.1 Transport 2. 1.2 Miscellaneous services 1.4 1.4 Source: CEIC, Census and Statistics Department 5
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Hong Kong Property Prices Hong Kong Office & Retail Rentals 2 2 4 4 19 19 3 3 17 17 2 2 Index 15 13 1 9 7 15 13 1 5 5 93 94 96 98 99 1 3 4 6 8 Private domestic (less than 4m2) Private domestic (16 m2 or above) 9 7 Index Source: CEIC - - -2-2 -3-3 -4-4 94 96 98 2 4 6 8 Office rentals Retail rentals Source: CEIC 7
Hong Kong Economic Monitor Statistics May 28 yoy() yoy() yoy() HKD bn yoy() HKD bn yoy() yoy() yoy() 22 1.8 1.4-2.6 3,318-2.6 2,76-5. -.9-3. 7.3 23 3. 3.2 -.6 3,567 7.5 2,35-2. 8.3-2.6 7.9 24 8.5 7.6 9.1 3,866 8.4 2,156 5.9 8.6 -.4 6.8 25 7.1 6.6 6.1 4,68 5.2 2,312 7.3 5.2 1. 5.6 26 7. 6.3 5.8 4,757 17. 2,468 6.7 15.5 2. 4.8 27 6.3 5.2.1 5,869 23.4 2,962 2. 2.6 2. 4. 28F 5. NA 11.4 6,542. 3,293 8.2. 3.5 3.8 Q3 26 6.4 NA 5.9 4,551 15.9 2,498.1 14.4 2.3 4.7 Q4 6.6 NA 6.3 4,757 17. 2,468 6.7 15.5 2.2 4.4 Q1 27 5.5 NA 6.6 4,973 18.2 2,672 14.8 16.5 1.7 4.3 Q2 6.4 NA 7.9 5,329 23.1 2,859 18.3 2.5 1.3 4.2 Q3 6.3 NA 12.6 5,694 25.1 3,42 21.8 22.3 1.6 4.1 Q4 6.6 NA 13.5 5,869 23.4 2,962 2. 2.6 3.5 3.6 Q1 28 NA NA 11.6 5,762 3,17 18.7 13.5 3.5 Nov 27 NA NA 15.3 6,99 24.6 3,196 19.4 21.9 3.4 3.6 Dec NA NA 12.5 5,869 23.4 2,962 2. 2.6 3.8 3.4 Jan 28 NA NA 17.6 5,774 19.3 3,59 19.9 16.9 3.2 3.4 Feb NA NA 4.5 5,817 16.2 3,2 15.3 13.7 6.3 3.3 Mar NA NA 13. 5,762 15.9 3,17 18.7 13.5 4.3 3.4 YTD NA NA 11.6 5,762 15.9 3,173 18.7 13.5 4.6 3.4 balance HK$bn yoy() HK$bn yoy() HK$bn yoy() yoy() ' yoy() 22 1,561 5.4 1,619 3.3-58.9-11.1-15.4 16,566 2.7 7.798 23 1,742 11.7 1,86 11.5-63.3-12. -12.7 15,537-6.2 7.763 24 2,19 15.9 2,111 16.9-92. 26.7 4.6 21,811 4.4 7.774 25 2,25 11.4 2,33.3-79.3 18. 23.5 23,359 7.1 7.753 26 2,461 9.4 2,6 11.6-138.8.7 21.2 25,251 8.1 7.775 27 2,688 9.2 2,868.3-18.5 11.6 12.1 28,169 11.6 7.81 28F 2,881 7.2 3,12 8.8-239.4 15.7 12. 31,718 12.6 7.8 Q3 26 666 8.4 692.6-26.3 -.9 2.5 6,375 6.7 7.788 Q4 674 11.8 77 14. -32.8 3.5 15.4 6,679 4.3 7.775 Q1 27 586 9. 626 9. -4.3 5.5 14.3 6,616 6.3 7.811 Q2 654 11.9 78 12.9-54.3 7.5.4 6,414 7.4 7.813 Q3 72 8.2 757 9.4-36.6 12.2.9 7,334 15.1 7.767 Q4 729 8.2 781.5-52. 21. 14.2 7,86 16.9 7.81 Q1 28 698.5 647 11.6-51.4 28.8 16. 7,276 7.781 Nov 27 244 6.6 26 9.3-16. 21.8 12.9 2,448 17.6 7.788 Dec 232 8.2 26.3-27.4 25.5 14.9 2,789 16.1 7.81 Jan 28 24 15.8 248 16.9-7.5 29.1 15. 2,519 16.2 7.81 Feb 184 7.6 2 11.9-15.8 29.2 15.6 2,352 2.9 7.779 Mar 251 7.6 223 6.6-28.1 28.2 17.2 2,44 23.1 7.781 YTD 698.5 647 11.6-51.4 28.8 16. 7,276. 7.781 Note: (F) Forecast GDP (real) Exports Source: CEIC, Hang Seng Bank Real GDP per capita Retail sales (real) Foreign Trade Imports Total Deposits Trade Property Price Index Total Loans Office Rental Index Money supply (Total M3) Consumer prices Tourist Arrivals Unemployment rate (s.a.) HKD per USD (end of period) 8
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