Irina Fan Senior Economist irinafan@hangseng.com Joanne Yim Chief Economist joanneyim@hangseng.com July 28 Upside Risk to Inflation and Downside Risk to Growth The economic landscape has changed significantly in recent months. Consumer price inflation crept up to 5.7 in May from to 5.4 in the previous month; and the rise in prices has become more broadly-based. Earlier this year, food-driven inflation was the centre of discussion and the shortage of food was deemed to be temporary. The food supply disruptions now seem not-so-temporary. What is worse, the high oil prices appear to be filtering through to other sectors, and the surging oil and commodities prices may yet reach their peaks in the international market. All these pose significant upside risk to our inflation forecast. On the trade front, Hong Kong s export performance has been stronger than expected as global demand remained firm despite the US s weakness. Hong Kong s exports gained.3 in May, after growing 14.5 in April, as shipments to major European and Asian markets were underpinned by the relative weakness of the Hong Kong dollar. In terms of domestic demand, however, signs of cooling demand are already evident. Retail sales volume grew a mere 5.5 in May, down from 11.5 in April. In addition, while the unemployment rate hovered at a -year low of 3.3 in May, total employment has been on a downtrend after hitting a peak of 3.55 million in January. The economic outlook is also uncertain. If oil prices rise further or stay at record levels, central banks in both emerging economies and industrialized countries may be forced to tighten monetary policy, posing downside risk to our growth forecast.
Retail Sales Growth Eased Sharply Retail sales volume grew a mere 5.5 1 in May, down from 11.5 in April. In value terms, retail sales expanded 12.9, driven mainly by rising prices. Retail business in May was adversely affected by a number of factors. For a start, consumer sentiment in Hong Kong was dampened by the tragic Sichuan earthquake which resulted in huge losses in human lives. In addition, the number of Mainland visitors to Hong Kong dropped during the month as mainland China s Golden Week Labour Holiday was shortened to only one day this year, from the usual five days previously. What is alarming is the widening gap between the value and volume growth, staying above seven percentage points for three consecutive months, indicating mounting inflationary pressure. For instance, the sales of food dropped 1.2 in real terms but climbed 14.3 in value terms. Fuel volume rose 12.6, but the value was inflated to a 33.6 growth. Looking ahead, the inflation pressure is becoming more challenging and the growth of the retail sales is likely to be driven by rising prices rather than volume. Exhibit 1: Hong Kong Retail Sales (May8) Exhibit 2 Value Volume All retail outlet 12.9 5.5 26 Food, alcoholic drinks & 14.3-1.2 22 tobacco 18 Supermarket 11.5.7 14 Fuel 33.6 12.6 Clothing & footwear 8. 6.6 6 Consumer durables 8.6.2 2 Department stores 9.1 4.8-2 Jewellery, watches, 18.4 1.3 clocks & valuable gifts Other consumer goods 14.7 8.8 Source: Census and Statistics Department -6 - -14-18 -22 Retail Sales 9 93 96 99 2 5 8 26 22 18 14 6 2-2 -6 - -14-18 -22 Volume Value Source: CEIC 1 Changes throughout the report are on year-on-year basis unless otherwise stated. 2
Export Growth Below Expectations Hong Kong s May export growth eased from 14.5 in April to.3 in May, below the consensus estimate of 13.8 conducted by Reuters. The figure still looks impressive, as growth stayed at double digits. Shipments to major European and Asian markets have so far expanded solidly helped by a weaker Hong Kong currency. For instance, the euro has appreciated by over 7 versus the local dollar this year. Looking ahead, the external environment is becoming more uncertain. The major industrial countries are facing rising risk of stagflation as the global credit crisis and surging oil prices start to impact their economies. Mounting inflationary pressure has also forced many of our Asian trade partners to tighten their monetary policies. Hong Kong s total export growth is likely to decelerate sharply in the second half of the year, but a growth of 7.2 for the full year of 28 is still achievable. Exhibit 3: Hong Kong Trade Statistics May8 Apr8 Total exports (HKD bn) 239 243 Domestic exports 8 8 Re-exports 231 236 Imports (HKD bn) 266 26 Total exports (yoy ).3 14.5 Domestic exports -12. -. Re-exports 11.3 15.5 Imports (yoy ) 15.4 11.3 Source: Census and Statistics Department Exhibit 4 Exhibit 5 Hong Kong Total Exports (3MMA) Exports to the US (3MMA) 25 28 25 2 24 15 2 16 5 12 8 4-5 - -4-15 -8-2 -12 98 2 4 6 8 yoy 2 15 5-5 - -15-2 94 96 98 2 4 6 8 5 4 3 2 - -2 yoy Volume Value Source: CEIC Hong Kong Mainland Source: CEIC 3
Unemployment Rate Stayed at a Decade Low Hong Kong s unemployment rate stayed at a decade low of 3.3 in May, but total employment declined 2,. Total employment has been on a downtrend after hitting a peak of 3.55 million in January. Labour market statistics are viewed as lagging economic indicators. It usually takes several months for cooling economic activities to have an impact on the labour market. Nevertheless, the trend of falling employment is likely to be an early warning sign of worse conditions ahead. The momentum of job creation looks set to slow further in coming months. The trade sector will likely be most affected by waning external demand, and the financial industry is also less keen to expand its workforce as the impact of the credit crisis becomes more apparent. The retail and hotel industries are underpinning employment growth for now, but the outlook is less certain as the recent earthquake in Sichuan and the severe flooding in Guangdong Province could impair travel sentiment of Mainland visitors, which is the largest source of tourists to Hong Kong. Overall, we expect the unemployment rate to go up in coming months to reach an average of 3.8 for the full year of 28. Exhibit 6 Exhibit 7 (') Total Employment 3,6 3,55 3,5 3,45 3,4 3,35 3,3 6 7 8 (') Unemployment Rate & Job Creation 5.5 5. 6 4.5 4. 3.5 3. 2.5 6 7 8-5 - -15 Source: CEIC New employment Unemployment rate (s.a.) Source: CEIC 3 25 2 15 5 (') 4
Creeping Inflation Consumer price inflation crept up to 5.7 in May, from 5.4 in April. The rise in prices was more broadly-based, as soaring food and energy prices filtered through to other sectors. The upsurge in food prices and more expensive restaurant meals kept the overall food prices high at double-digits. Food prices (excluding meals bought away from home) stayed high at around 19 and meals at restaurant rose slightly to 6.4, from 6. in the previous month. Food prices are likely to grow at a fast pace in the next two months as the earthquake in Sichuan Province and severe flooding in the Guangdong Province would cause disruption in food supply. The sharp rising private rentals lifted the overall housing rentals to 6. from 5.5 in the previous month. High global energy prices also resulted in higher utility charges which rose by 6.9. Prices of miscellaneous goods also crept up 5.1. The elevated global food and energy prices are likely to be persistent this year, and thus the CPI readings would stay high. We now see higher inflation rate of 5. for 28. Exhibit 8 Exhibit 9: Hong Kong Composite CPI Component, yoy May8 Apr8 All items 5.7 5.4 Food 11.2 11.1 Meals bought away 6.4 6. from home Exclude meals bought 19.2 19.4 away from home Housing 6. 5.5 Electricity, gas & water 6.9 8.7 Alcoholic drinks.5.2 & tobacco Clothing & footwear 1.9 1.4 Durable goods -1.9-3.1 Miscellaneous goods 5.1 5.2 Transport 2. 2. Miscellaneous services 1.2.6 Source: CEIC, Census and Statistics Department 5
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Hong Kong Economic Monitor Statistics July 28 GDP (real) 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. 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 7.1 NA 11.6 5,762 15.9 3,17 18.7 13.5 4.6 3.5 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 Apr NA NA 11.5 5,777 17. 3,222 24.6 14.5 5.4 3.3 May NA NA 5.5 5,731 13.3 3,279 24.1 11.5 5.7 3.3 YTD NA NA 9.6 5,731 13.3 3,279 24.1 11.5 4.9 3.3 Exports Real GDP per capita Retail sales (real) Foreign Trade Imports Total Deposits Trade Total Loans Property Price Index Office Rental Index Money supply (Total M3) Consumer prices Tourist Arrivals Unemployment rate (s.a.) HKD per USD (end of period) 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 Jan 28 24 15.8 248 16.9-7.5 29.4 14.4 2,519 16.2 7.81 Feb 184 7.6 2 11.9-15.8 29.9 15.1 2,352 2.9 7.779 Mar 223 7.6 251 6.6-28.1 28.8 16. 2,44 23.1 7.781 Arp 243 14.5 26 11.3-16.2 25.7 18.7 2,42 11.2 7.792 May 239.3 266 15.4-27.5 24.5 2.6 2,342 6.3 7.84 YTD 1,129 11.2 1,226 12.3-95.1 27.6 17. 12,37 9.5 7.84 Note: (F) Forecast Source: CEIC, Hang Seng Bank 8
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