20 June 2017
2017 Mid-Year Export Assessment: Wide Indications of Recovery Despite Sustained Headwinds
In response to an improving global trade environment, Hong Kong’s export performance has been above par thus far. Almost a decade after the global economy was hammered by the financial tsunami, the world recovery has ultimately become more stable and broadly based. With the expansion in both developed and emerging economies staying generally on course, overall foreign demand should remain sturdy over the medium term. Growth of Hong Kong exports is expected to moderate in the second half of 2017 amid a higher comparison base. As such, Hong Kong exports are now projected to grow by 5% in 2017 as opposed to the zero growth previously forecast. Undercurrent of US protectionism, political uncertainties in the EU, renewed faltering of emerging markets, disruptive slowdown of the Chinese economy, and heightened geopolitical tensions are the major downside risks.
A Solid Rebound in Early 2017
Helped by a low comparison base and faster than anticipated recovery of the global economy, Hong Kong’s export performance has so far been above expectations. In the developed world, rising confidence and falling joblessness have continued to fuel US growth. Given accommodating policies, improving labour markets, and increasing exports, the EU is experiencing a cyclical economic upturn, while the Japanese economy continues to grow at a modest pace amid sustained fiscal stimulus and steady exports. Meanwhile, economic growth is picking up in many emerging markets on the back of higher external demand, as well as firmer oil and commodity prices that benefit the economies reliant on natural resources. Although China is experiencing slower growth in the midst of its restructuring process, the pace of expansion is still relatively enviable, and developing Asia continues to be the most dynamic region.
Against this background, Hong Kong exports surged by 9.4% year-on-year in the first four months of 2017, reversing a 0.5% fall for the whole of 2016. Among the traditional markets, exports to the US were up by 1.3%, the EU by 3%, and Japan by 5.3%. In the emerging world, exports to developing Asia leapt by 13%, with sales to the Chinese mainland and ASEAN growing by 10.3% and 8.6% respectively. Exports to emerging Europe and Africa also managed to post increases, although Latin America, dragged down by Mexico – Hong Kong’s largest market in the region – and the Middle East, in view of the adverse geopolitical developments, were exceptions to the general upward trend.
If anything, higher unit values of Hong Kong exports, which increased by 1.6% in the first quarter of 2017, in contrast to a 1.7% decline for the whole of 2016, also contributed to the decent sales performance. Evidently, firmer oil and commodity prices, hand-in-hand with stronger overseas demand, served to exert upward pressure on export prices, let alone the continued upward pressure exerted by escalating labour costs on the mainland. In addition, stabilisation of the RMB against other major currencies was another contributor. In contrast with a 6.4% fall in 2016, the RMB rose by 0.6% against the US dollar in the first four months of 2017, whereas its depreciation against the euro and the yen narrowed from 2.9% to 2.5% and 9.6% to 3.9% in the same period respectively.
Cautiously Optimistic Prospects for the External Environment
The global economy has opened the New Year on a positive note, and is poised to fare well through the rest of 2017 and 2018. Marking the first time in six years it has upgraded the assessment of world economic prospects, the IMF raised the growth forecast for this year to 3.5% from 3.4%, with a further quickening of 3.6% projected in 2018. With the expansion in both developed and emerging economies largely on track, Hong Kong exports should maintain their growth trajectory. Indicative of the cautiously optimistic outlook for the global trade environment, the HKTDC Export Index rebounded strongly from 33.7 in the fourth quarter of 2016 to 47.1 in the first quarter of 2017 and further to 50.1 in the second quarter of 2017, the highest and first above-50 reading since the second quarter of 2013 when the index stood at 53.4. A reading above the watershed of 50 indicates a positive sentiment among Hong Kong exporters, although this rise in optimism has been tempered by continued cautiousness amid sustained headwinds in overseas markets.
In the developed world, the US will continue to lead the pack, as the slowdown in the early months appears to have been temporary. Consumer spending will remain a main driver, aided by low unemployment, steady payroll gains, an improving housing market and stronger consumer confidence. If anything, the promised pro-growth tax overhaul and infrastructure development plan are expected to provide an added boost. Given a strengthening US economy, the Federal Reserve should be on course to normalise its monetary policy, with the pace of tightening dependent on the inflation trend. In this regard, a comparatively strong dollar will likely hurt US exports and the earnings of multinational corporations. Furthermore, there are mounting concerns about the Trump administration’s ability to push through the proposed massive fiscal stimulus as any trimmed-down version may lead to slower US growth.
Across the Atlantic, economic recovery in the EU will likely gather further steam on the back of an ultra-loose monetary policy, reduced fiscal belt-tightening, easing deflationary pressure and greater political stability in the wake of the Dutch and French elections. Relative weakness of the euro, coupled with a steady improvement of the global trade environment, should also bolster EU exports, particularly benefiting externally-oriented states like Germany, whereas better labour market conditions should be conducive to consumption. That said, geopolitical tensions, the spectre of terrorism, and the unresolved immigration crisis will continue to undermine sentiment and the growth outlook. To complicate matters, Brexit negotiations will be a difficult and uncharted process. The British departure from the EU will pose serious threats not only to the UK, but also the EU on the whole by disrupting the well-established economic and trade relations between the EU and the UK.
Likewise, the Japanese economy should remain on a moderate growth path alongside an ultra-lax monetary policy, sustained public spending, lower deflationary pressure, as well as increasing exports. A yen that is forecast to remain cheap as US monetary policy continues to tighten, on top of a favourable external environment, will likely shore up export performance, and in turn inject some vigour into industrial production and business investment. Despite the probable gains in employment, however, wage rises and hence consumption are expected to be contained. Consumer sentiment may also be given a temporary lift as the second round of consumption tax increases scheduled for April 2017 has been postponed until October 2019.
While Hong Kong exporters are advised to intensify their sales efforts in order to capitalise on the growing opportunities in the developed world, they should not overlook the emerging economies, which are expected to continue to do well over the medium term. For one thing, a projected stabilisation of oil and commodity prices over the medium term should continue to augur well for the economies dependent on natural resources. For another, an improved appetite for consumption in the developed nations will give another boost to the export-oriented emerging economies at large. In this context, developing Asia will remain the most vibrant territory on the global economic scene, notwithstanding a slower mainland economy.
For China, growth will shift into a lower gear in pursuit of a more sustainable and balanced expansion based on consumption, while reiterating the basic focus on seeking progress and maintaining stability. Supply-side reforms, which include trimming overcapacity, reducing inventory, deleveraging, lowering costs, and strengthening areas of weakness, will continue to be a priority to improve the quality of the economy. A number of other initiatives, notably the Belt and Road Initiative, the Free Trade Zones, the Internet Plus and the Made in China 2025, should also facilitate economic upgrading and increased integration with the world economy. This is expected to bring about higher efficiency and productivity, albeit with periodic volatilities and short-term uncertainties. Against this backdrop, efforts to prop up consumption should whet an appetite for consumer goods, whereas industry upgrading, plus rising overseas orders, should bolster the demand for capital goods.
Contrastingly, growth of the ASEAN economy is set to quicken, spurred on by a decent global trade environment, robust domestic demand and growing foreign investment. While rising export production should fuel the import demand for capital goods, the Hong Kong-ASEAN Free Trade Agreement (HAFTA), which is expected to be signed in 2017, would brighten the sales outlook for consumer goods currently subject to higher import duties. Apart from market opportunities, the great diversity of ASEAN countries further offers alternative production bases outside China. In particular, Vietnam, despite the withdrawal of the US from the Trans-Pacific Partnership (TPP), Indonesia and Myanmar are attractive manufacturing locations. Outside ASEAN, India is another bright spot, thanks to the implementation of major reforms along with proper fiscal and monetary policies. Its favourable demographics also provide a new choice for relocating labour-intensive industries from the mainland.
In Latin America, the modest recovery of the regional economy is expected to take hold amid the stabilising oil and commodity market yet the pace of resurgence tends to vary markedly from country to country, with the region’s two biggest economies likely to disappoint. While Brazil’s outlook will remain clouded in light of economic mismanagement and political challenges, growth in Mexico could be dragged down by heightened uncertainties about US-Mexico trade relations under the Trump administration. Likewise in emerging Europe, the steady EU recovery will provide some impetus to regional growth. Poland, Hungary, and the Czech Republic are slated to capitalise on EU growth. To a certain extent, Turkey will also benefit from the EU recovery, although its economic prospects are tainted by persistent security concerns. The Russian economy, for its part, should continue to receive some support from firmer oil and commodity prices.
In the Middle East, more stable crude prices should also bode well for the prospects of oil exporting countries there. For instance, Saudi Arabia, which is striving hard for economic diversification in tandem, should witness faster growth over the medium term. Meanwhile, the lifting of international economic and financial sanctions could lead to the acceleration of Iran’s economy, but souring relations with the Trump administration is a potential destabilising factor. More seriously, geopolitical tensions and security threats will continue to weigh on regional growth, and remain one of the major challenges to doing business there. Accordingly, Hong Kong exporters, aside from selling direct to the concerned markets, may take advantage of Dubai’s entrenched role as a regional trading hub, which attracts buyers from as far afield as Africa.
Overall, in the wake of the strong start to 2017, there are growing signs that a more stable and broadly based recovery of the global economy has become a reality, with growth momentum generally taking hold in both developed and emerging markets. This is certainly good news for Hong Kong exporters as overall foreign demand should remain robust in the context of a sanguine external environment. Given a higher comparison base, however, growth of Hong Kong exports is expected to moderate in the latter half of 2017. Against this backdrop, Hong Kong exports are now projected to grow by 5% in 2017, as opposed to the zero growth forecast made in December 2016. Looking ahead into 2018, Hong Kong exports should continue to perform well as the world trade environment continues its positive momentum, barring any serious disruptions that could cause the steady revival to halt.
Potential Downside Risks
Undercurrent of US Protectionism
A compromised pro-growth economic agenda by the Trump administration could undermine import demand from the US, however developments in Sino-American trade relations may have a more direct impact on Hong Kong exports. While the US has not designated China as a currency manipulator, and the 100 days of trade talks with the mainland has yielded some early positive results, there are no indications that the tide of protectionism has subsided. The US president, albeit not specifically targeting China, has issued various executive orders to deal with trade deficit, anti-dumping enforcement, steel imports, and WTO rules. Within this setting, however remote a full-fledged trade war between the US and China may be, growing trade conflicts between the two countries appear to be inescapable.
Political Uncertainties in the EU
In addition to Brexit, a string of high-stake elections serve to bring further uncertainty to the EU as the rise of populism and EU skepticism continues to pose an existential threat to the bloc. Following the temporary relief in view of the recent Dutch and French election results, other battles that may impact the future of the EU will soon be seen in the upcoming elections in Germany and Italy. In particular, outcomes of the general elections in Italy, where the economy is still weak and support for the euro is low, could pose a much bigger threat to the survival of the EU. In all, although it is still proving difficult for anti-establishment parties to gain power in the short term, any increase in political fragmentation will hinder the further integration and development of the bloc, which may translate into a less lucrative market for the rest of the world.
Renewed Faltering of Developing Economies
Ironically, a strong rebound by the developed economies, albeit broadly supportive of growth in the emerging world, may cast a shadow over the economic prospects of some developing economies. In the US, a more rapid monetary tightening cycle in view of rising inflation cannot be ruled out. Even in the EU and Japan, a steady economic recovery, coupled with alleviating deflationary pressure, could ultimately lead to an unwinding of their ultra-loose monetary policies. Any less accommodative policy actions taken by the major central banks could prompt increased capital outflows from emerging economies, particularly putting a renewed strain on those countries with fragile fundamentals and large external requirements. Additionally, if the stabilisation of oil and commodity prices cannot be sustained as supply outstrips demand, those economies dependent on natural resources would again be affected.
Disruptive Slowdown of the Chinese Economy
The slowdown and rebalancing in China are not only a big challenge to China itself, but also a grave concern for the global economy. In all likelihood, the transition will continue to affect world trade and commodity prices. Although the slowdown of the Chinese economy seems to have stabilised somewhat, the recent steadiness has been supported by strong credit expansion and a surge in industrial activity at the expense of restructuring goals like shaving capacity, reducing inventory and cutting leverage. The tasks associated with the correction of major imbalances therefore remain strenuous, and the risk of a further slowdown is real. If the Chinese economy decelerates more than anticipated, it will drag down global trade and commodity prices, especially hurting those countries that depend on exports to the mainland, such as Japan, Korea and other commodity producers.
Heightened Geopolitical Tensions
Separately, a deterioration of the geopolitical environment in certain regions could spoil trade prospects by impairing market sentiment and broader economic confidence. A notable case in point is the Middle East and North Africa, where geopolitical tensions are expected to stay heightened in the foreseeable future. Political unrest and military conflicts in connection with the Islamic State, in particular, will continue to have serious implications for the EU in the form of terrorism and an influx of refugees. To add to the woes, the EU’s relations with Russia remain tense over the unresolved crisis in Ukraine, again threatening regional stability and the recovery outlook of the bloc. Closer to home, strains in the Korean peninsula, aggravated by lingering territorial disputes in the East China and South China seas, invariably bring unabated threats to regional stability and trade flows.