16 June 2015
2015 Mid-year Export Assessment: A Moderate and Uneven Market Outlook
In line with the unsteady external environment, Hong Kong exports grew by a tepid 2.3% in the first four months of 2015. The world trade environment, however, is expected to brighten somewhat over the medium term, even though the growth prospects will likely remain uneven across the major economies. The developed nations, led by the US, should stay on an expansionary track. Emerging economies are expected to fare less well, although they should pick up again next year. Against this background, overseas sales should remain moderate and uneven, with Hong Kong’s total exports projected to grow by 3% in 2015, unchanged from the previous forecast. Sustained deflationary pressure in developed economies, continued faltering of developing economies, and lingering geopolitical tensions are the major downside risks to the export outlook.
Early 2015: Divergent Export Showings
Notwithstanding a low comparison base, Hong Kong’s export performance was sluggish in the first four months of 2015, a consequence of the hesitant state of the world economy. Once again, the US was hurt by severe winter weather. The EU has been weighed down by Greece’s debt crisis. Japan continues to struggle with stagnating growth and a renewed threat of deflation. China has faced a slower, albeit still reasonable, economic expansion sparked by its efforts to address structural deficiencies. Meanwhile, many of the resource-rich countries have been hampered by slackening oil and commodity prices. Against this background, Hong Kong exports grew by just 2.3% year-on-year during January-April 2015, compared with the 3.2% increase for the whole of 2014.
In terms of individual markets, Hong Kong exports to the EU and Japan contracted during January-April 2015, although sales to the US expanded by 6.2%, a reflection of its solid fundamentals despite any temporary economic setback. Likewise, most other markets performed less well during the same period. The major exception was ASEAN, with input demand from Southeast Asian manufacturers bolstered by increasing US orders for their products. Emerging Europe, on the other hand, was the weakest spot, with the region primarily weighed down by plummeting sales to Russia, where the economy has been severely impaired by feeble oil and commodity prices, as well as the Western sanctions imposed over the Ukrainian crisis.
On the whole, Hong Kong exports would have fared still worse had their average unit value not expanded at an unabated tempo (up 2% y-o-y in the first quarter of 2015 on top of the 2% rise in 2014). Evidently, dwindling oil and commodity prices, coupled with tepid overseas demand, have exerted downward pressure on export prices. Despite this, such downward pressure has been more than offset by upward pressure. In particular, escalating labour costs on the mainland, along with the RMB strong against most currencies, have greatly inflated the input costs of Hong Kong exports. In 2014, the RMB depreciated by 2.5% against the US dollar, but appreciated by more than 11% against both the euro and the yen. So far this year, the RMB has crept up slightly to the greenback, while it appreciated further by some 9% against the euro and 5% against the yen.
The Global Trade Environment: Brightening yet Unstable
The global economy is expected to take a turn for the better in the remainder of 2015, as well as throughout next year. Global growth prospects, however, are uneven across the major economies. According to the IMF, global growth is projected to quicken to 3.5% in 2015 and 3.8% in 2016, up from 3.4% in 2014. This will be driven by a rebound among the advanced economies, with aggregate growth forecast to increase from 1.8% last year, to 2.4% this year and next, a development supported by the decline in oil prices. In contrast, the IMF expects the growth of the emerging economies to slow to 4.3% this year, down from 4.6% last year, before rebounding to 4.7% next year. To some extent, Hong Kong exports should recover from the slack in the early part of the year. This is borne out by the 2Q15 HKTDC Export Index that indicates a slight improvement in the overall confidence of Hong Kong exporters over the near term.
Emerging from the soft patch caused by the brutal winter weather, the US will continue to lead the pack, underpinned by low unemployment, steady payroll gains, an improving housing market, better household balance sheets and stronger consumer confidence. As the US economy gathers steam, the Federal Reserve will be on course to normalise its monetary policy, but at a slow and tempered pace. The consequent stronger dollar, though, will somewhat undermine US exports and the earnings of multinational corporations. By and large, US consumers will generally remain conservative. Many recession-induced consumption habits, especially the penchant for competitively priced products and low-cost outlets, are expected to persist, although the better-off shoppers are already showing an increased inclination to spend.
Meanwhile, the economic prospects of the EU will be improved by its massive bond buying programme, which will serve to boost exports by pushing down the euro and reducing borrowing costs by lowering bond yields. In tandem with the Investment Plan for Europe, designed to bolster investment in the region, the EU economic revival should gather momentum throughout the rest of 2015 and into 2016, with domestic demand providing the major spur to growth. Despite a better recovery outlook, high unemployment, rising deflationary pressure, austerity and deleveraging, lingering debt problems, as well as geopolitical disturbances, remain major threats and challenges. If anything, such developments will likely constrain any revival in consumer confidence. Consumption is only expected to expand at a modest pace, with austerity remaining the creed, with the weak euro further souring the appetite for imports.
In Japan, “Abenomics” should continue to have a broadly positive impact on the economy. Aggressive monetary easing should keep the yen weak and enhance the price competitiveness of Japanese exports. Rising corporate profits could also bode well for employment and wage prospects. The spectre of deflation and the slow progress of structural reforms, however, remain cause for concern. Consumption, though, may strengthen before being dampened by a second round of VAT increases scheduled for April 2017. In any event, a weak yen will remain a drag on the country’s intake of consumer goods, even if stronger Japanese exports bode well for the imports of industrial inputs.
Hong Kong exporters are advised to intensify their sales efforts in order to capitalise on the renewed opportunities in the traditional markets. They should not overlook, however, the emerging markets, which are expected to grow over the medium term. Low crude prices will also benefit oil-importing emerging economies, albeit at the expense of oil-exporting nations. Rising demand from the developed nations, notably the US, will give another fillip to growth. On the other hand, the diverging monetary policies of the major economies may lead to volatile capital flows and exchange rate movements in the emerging markets. Those with strong economic fundamentals and those that can leverage on the lax monetary conditions in the eurozone and Japan, however, are better positioned to cope with any likely capital market volatility.
Once again, developing Asia will remain the worlds’ most dynamic region. In terms of growth, China will shift into a more moderate gear in pursuit of a more sustainable and balanced expansion based on domestic demand. While the government will accept a lower growth rate as the new normal, stimulus measures are expected to uphold the momentum of the economy. A number of moves, such as expanding the free trade zones and the “One Belt One Road” initiative, should facilitate economic upgrading and greater integration with the world economy. Industry upgrades, based on innovation, smart technology, mobile internet and cloud computing, are also of great import. In this regard, the “Made by China 2025” plan, alongside the “Internet Plus” plan, should lead to increased overall efficiency and productivity.
In contrast to China, the growth of the ASEAN economy is expected to accelerate, largely thanks to greater regional integration, increased spending on infrastructure projects, sustained foreign direct investment inflows and the roll-out of much needed structural reforms. In particular, confidence in Indonesia’s economy will be boosted by structural reforms, while political stability and the imminent conclusion of the Trans-Pacific Partnership (TPP) will encourage foreign manufacturers to establish a presence in Vietnam. Indeed, Indonesia and Vietnam, in tandem with Myanmar, are proving increasingly attractive production bases for foreign firms as the production environment in China becomes ever more challenging. Outside ASEAN, India is another bright spot, a consequence of its economic stability and accelerated reforms.
Elsewhere in the developing world, there is no lack of welcome for Hong Kong exporters. In Latin America, the outlook for resource-rich countries has been largely tainted by low commodity prices. Brazil, though, should benefit somewhat from hosting the 2016 Summer Olympics, while Mexico will piggyback on the resurgent US economy. In emerging Europe, the gradual EU recovery will also provide some impetus for regional growth. Poland, Hungary, the Czech Republic and Turkey are expected to capitalise on EU growth. Nonetheless, Russia will continue to suffer from the uncertainties stemming from the Ukrainian crisis, with the situation aggravated by shaky oil and commodity prices.
As for the Middle East, low oil prices will continue to have an impact on regional growth. Saudi Arabia and the UAE, however, should be able to withstand the muted crude prices given their huge reserve funds, while Iran’s economy could soar strongly in an optimistic scenario built on expected sanctions relief. As the unabated political unrest in the region is a worry, Hong Kong exporters should take full advantage of Dubai’s entrenched role as a regional trading hub. Dubai attracts buyers from as far afield as Africa, where economic growth will continue to pick up fast from a low base, largely on the back of rising inflows of capital and investment.
In all, following the slow start in the early part of the year, the global economy is set to gather pace across the remainder of 2015. For one thing, there are indications that the US economy has started to regain momentum, while the EU and Japan are largely on a recovery trajectory. For another, the emerging economies, though in a slower lane, are also expected to show a tentative resurgence. Stronger demand from traditional markets, along with divergent opportunities in the fledgling markets, should underpin the global trade environment. In this context, Hong Kong exports are expected to grow by 3% in 2015, unchanged from the previous forecast made in December 2014. Looking further ahead, growth of Hong Kong exports will continue at a respectable level in 2016, although there is no shortage of risks and challenges likely to emerge over the short to medium term.
The Medium-term Outlook: Likely Downside Risks
A strong rebound in oil prices
The fall in crude prices is definitely a boon for oil-importing countries, potentially stimulating consumption and fuelling global growth. While showing signs of bottoming out, oil prices are expected to hover around the lower levels over the medium term amid a slow pickup in oil demand and ample existing supplies. There is a risk, though one with a low probability, that oil prices could rebound strongly if supplies decline in view of, for instance, slower shale oil production in the US or elevated geopolitical disruptions to the Middle East. A weak dollar, albeit unlikely due to an imminent interest rate hike in the US, would exert further upward pressure on oil prices. Any strong rebound in crude prices will likely place oil-importing economies at a disadvantage and derail the fragile global recovery.
Sustained deflationary pressure in developed economies
On the flip side, slackening oil prices could intensify deflation problems. In particular, with prevailing inflation below target in many developed economies, there remains the risk of diving into persistent deflation. Deflationary pressure poses the most serious threat to the eurozone. Stubbornly high unemployment and the diehard debt problems, exemplified by the possibility of Greece’s exit from the euro, continue to weigh on consumption and place a heavy drag on economic growth for the foreseeable future. Owing to the weak fundamentals of some EU members, any renewed shock in the eurozone would reverberate across the region, with detrimental effects on the global economy and the overall trade environment.
Continued faltering of developing economies
While falling oil and commodity prices pose the biggest threat to resource-rich countries, the likelihood of divergent policy directions taken by major central banks could put a considerable strain on those emerging economies with large external requirements, although many of them now have much stronger economic fundamentals than in the past. Given the discrepancy between the Federal Reserve’s gradual monetary tightening and the lax monetary policies in the eurozone and Japan, the world’s capital markets are likely to be volatile. Conceivably, the prospective normalisation of the US monetary stance could prompt capital outflows from emerging economies, causing liquidity to tighten, their currencies to depreciate and, ultimately, a deterioration of macroeconomic stability.
Lingering geopolitical tensions
Current geopolitical developments in a number of regions, if they deteriorate still further, could incite further trade tensions and impair the external trade environment. In the Middle East and North Africa, political unrest and military conflicts continue in several countries, especially Libya, Syria and Iraq. In addition, the unresolved crisis in Ukraine is threatening not only regional stability and economic growth in Russia, but also the recovery outlook of the EU. Closer to home, territorial disputes in the East China and South China seas, tensions in the Korean peninsula and socio-political uncertainties in Indochina also pose a continued threat to regional stability and trade flows.