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Hong Kong Export Outlook for 2018: Continued World Recovery Supports a Favourable Environment for Exports podcast

Although the world economy may experience some challenges in the coming year, its recovery is expected to stay on course. The environment for trade should remain favourable. In the US and the EU, both consumption and business investment are improving. Emerging economies in general are also expected to do well. The HKTDC Export Index survey indicated that the underlying positive export trend for 2017 looks set to continue into 2018, with 76% of the exporters surveyed saying that they expected their level of sales to increase or remain unchanged over the coming year. However, the pace of growth is expected to slow, and there are some potentially negative factors which could threaten this optimistic outlook – notably, rising Sino-US trade tensions, the possibility of a faster–than-expected tightening of the US monetary stance and escalating geopolitical friction.

A Solid Rebound in 2017

World economic recovery continued to gain momentum in 2017 with GDP growth accelerating in most major economies. Hong Kong’s export performance rebounded well from a low base in most overseas markets. Rising consumer confidence and business confidence in the developed world have continued to support growth.

Growth in the US has been driven by both private consumption and equipment investment. In the EU, economic growth has surpassed expectations, propelled by private consumption amid lowering unemployment, while investment has also showed signs of picking up thanks to low borrowing costs and the loose monetary stance of European central banks. Japanese economic growth also edged up, supported by stronger exports. In China, growth remained stable driven by both domestic and external demand; while the developing economies of Asia as a whole continued to be the world’s most dynamic region.

Table: Summary of Hong Kong’s External Trade
Table: Summary of Hong Kong’s External Trade

Against this background, Hong Kong’s total exports surged by 8.3% year-on-year in the period Jan-Oct 2017, following a decline of 0.5% for the whole of 2016. This rebound was broadly based across major markets. Amongst Hong Kong’s traditional markets, exports to the US, the EU and Japan all grew to varying degrees during the period Jan-Oct 2017.

The rebound in exports to China and ASEAN may partly be due to intra-regional shipments picking up. As developed markets recovered, cross-border trade along the global value chains received a boost, thereby increasing Hong Kong exports to the Chinese mainland and ASEAN. There was also a rise in exports to the emerging European economies, Latin America and Africa, where economic performance was partly supported by the stabilising commodity market.

Table: Hong Kong’s Total Exports by Primary Destination
Table: Hong Kong’s Total Exports by Primary Destination

Electronics exports increased by 9.9% in the first 10 months of 2017, on top of a 2.5% increase in 2016. They constitute about 66% of Hong Kong’s total exports. Thanks to the surge in demand for electronic and video games, exports of toys were the biggest gainer, growing 30.1% in the first 10 months of 2017, while household electrical appliance exports also showed a significant increase of 8.8%. While exports of watches and clocks have showed signs of improvement in recent months, they still saw a dip of 5.3% over the period. Facing competition from other production bases, exports of clothing also recorded a decline.

Table: Hong Kong’s Total Exports by Selected Industry Sector
Table: Hong Kong’s Total Exports by Selected Industry Sector

Higher unit values of Hong Kong exports also contributed to the growing sales value. Although unit values fell 1.7% in 2016, they increased by 1.7% over the first nine months of 2017. Improving overseas demand, along with steadier commodity prices and continued rising labour costs on the mainland, served to support export prices.

Global Environment Continues to Improve

The pickup in growth of the global economy has been strengthening through 2017 and is widely expected to continue into 2018. This recovery appears to be broad-based with growth in investment, trade and consumption coupled with strengthening consumer and business confidence. According to the IMF, global growth is projected to continue its momentum, with growth of 3.6% in 2017 followed by 3.7% in 2018.

With the expansion in both developed and emerging economies appearing likely to continue, there is a growing confidence that a synchronised recovery is taking hold and that overall demand should remain sturdy over the medium term. That said, the external environment will remain unpredictable and there are formidable risks and challenges facing Hong Kong’s exporters.

Chart: Output Growth of Advanced Economies vs Developing Economies
Chart: Output Growth of Advanced Economies vs Developing Economies

Among the economies of the developed world, the US accelerated by 3.3% in the third quarter of 2017 and is expected to continue to lead the pack. Consumption will remain a driver, aided by low unemployment, steady payroll gains and an improving asset market. Another positive development is the rise in investment, particularly business investment, making US economic expansion increasingly broad-based across sectors. The promised pro-growth tax overhaul is making headway and is expected to provide an additional boost. That said, uncertainty still exists – both over how long it will take tax reform to be implemented and how quickly the Federal Reserve will tighten monetary policy in response to faster economic growth.

In the EU, growth has been driven by rising private consumption amid improvements in the labour market. Rising employment is expected to continue due to growing domestic demand along with the labour market reforms being implemented in some EU countries. Increasing business confidence, coupled with expectations of higher consumer demand, accommodating financing conditions, and diminished political uncertainty, is leading to improved investment. Economic recovery, therefore, is likely to continue. Yet geopolitical tensions and the threat of terrorism continue to undermine sentiment and the outlook for growth. The UK’s impending departure from the EU creates further uncertainty. Brexit poses an economic threat not only to the UK, but also to the EU, by disrupting the deep-rooted economic and trade relations between the EU and the UK.

In Japan, the victory of the ruling Liberal Democratic Party in recent parliamentary elections is likely to lead to a boost in government spending to ramp up the Abenomics deflation-fighting economic policy mix. Combined with an ultra-loose monetary policy, lower deflationary pressure, increasing exports and an uptick in spending in the run-up to the 2020 Tokyo Olympics, this should mean that the Japanese economy remains on a moderate growth path. A rise in employment and signs of a shift towards permanent contracts may help support wage and consumption growth, though the pace of increase may remain slow.

Emerging economies are also expected to do well. The recent strengthening of commodity prices has benefited economies dependent on natural resources, and the projected moderate rise in commodity prices over the medium term should continue to support them. Increasing consumption in the developed nations will also give a boost to export-oriented emerging economies. Against this backdrop, developing Asia should remain a vibrant territory in the global economic scene.

The economy of mainland China is expected to maintain its current growth level. Supply-side reforms will continue to be a priority to improve the efficiency of the economy, and a number of other initiatives, notably the Belt and Road Initiative, the Guangdong-Hong Kong-Macau Bay Area and Made in China 2025, should further facilitate economic upgrading and increased global integration. As part of the strategy to re-balance the economy, using private consumption as a driver for growth appears to be gaining ground. China is also adopting policies to bring in more imports to help satisfy domestic consumer demand.

Spurred by a decent global trade environment, robust domestic demand and growing foreign investment, the growth of the ASEAN economy has quickened and this momentum is expected to continue. Rising export production should fuel the demand for imported capital goods, while the imminent implementation of the Hong Kong-ASEAN Free Trade Agreement (HAFTA) may increase demand for certain consumer goods. The great diversity of ASEAN countries also offers alternative production bases outside mainland China, which should mean a growth in demand for intermediate and capital goods. Outside ASEAN, India is another bright spot. Structural reforms such as the launch of the national Goods and Services Tax should help to unify India’s vast domestic market and push up growth.

The modest recovery of Latin America’s regional economy is likely to continue thanks to the stabilising oil and commodity market. However, the pace of revival varies markedly from country to country. In Brazil, for example, the economic outlook looks cloudy in the light of economic mismanagement and political challenges, while the Mexican economy may be hindered by the heightened uncertainties in US-Mexico trade relations in the wake of the election of Donald Trump.

The gradual recovery in the EU’s economy is likely to provide an impetus to growth in the emerging European economies. Poland, Hungary and the Czech Republic in particular are expected to capitalise on this. Turkey’s exports will also benefit from the EU’s recovery, but its economic prospects are tainted by persistent security concerns. The Russian economy should continue to be helped by stabilising oil prices and improved confidence.

In the Middle East, stable crude oil prices should support the prospects of oil exporting countries like Saudi Arabia. Iran’s economy is likely to be boosted by the lifting of international sanctions and the re-election of a relatively liberal government which is likely to continue a policy of economic deregulation. However, the country’s souring relations with the US is a potential destabilising factor. Furthermore, geopolitical risks and insecurity across the region will continue to dampen prospects for regional growth.

Risks and Challenges

Protectionism is always a potential threat to Hong Kong’s exports outlook. In the US, the government has recently initiated anti-dumping and Section 301 investigations against China. While such trade tensions between China and the US are not unusual, and while President Trump’s trade policy towards China appears so far to be more moderate than his protectionist rhetoric in his election campaign, a fully-fledged trade war between the US and the mainland cannot be ruled out and remains a major risk.

While another major global downturn is not likely to be a threat in the near term, any faster-than-expected tightening of the US’s monetary stance could prompt capital outflows from emerging economies, causing liquidity to tighten. This will create difficulties for economies with high levels of borrowing, and may result in currency depreciation and economic instability. It is also possible that the EU could unwind its loose monetary policy earlier than expected, encouraged by its steady economic recovery.

In the EU, the rise of populism and euro-scepticism remains a potential threat to the bloc. Although pro-EU parties remain in power after elections in the Netherlands, France and Germany, populist movements have not faded away. A further challenge will be the general elections in Italy, where the economy is still weak and support for the euro is low. Difficulties in forming a coalition government in Germany may also undermine its ability to shape policy and take a leadership role in the EU.

The economic transition of mainland China will continue to affect world trade and commodity prices. Although the economy seems to be adjusting well to its “new normal”, the tasks associated with the correction of major supply-side imbalances remain strenuous. If the country’s economy decelerates more than anticipated, it will drag down global trade and commodity prices, especially hurting those economies that depend on exports to mainland China.

Adverse geopolitical developments could also hurt trade. In the Middle East, geopolitical tensions are likely to remain high in the near future. Political and military conflicts connected to the Islamic State group will have serious implications for the EU in the form of terrorism and influxes of refugees. Heightened tensions in the Korean peninsula are also a major threat to global and regional stability.

Favourable Prospects for Hong Kong Exports

With the recovery of world economy expected to remain on course, the global trade environment should remain favourable. Firmer commodity prices and stronger overseas demand will help support Hong Kong’s export unit value. According to the HKTDC Export Index survey, the underlying positive export trend recorded for 2017 looks set to continue into 2018, with 76% of the exporters surveyed indicating that they expected their level of sales to increase or to remain unchanged over the coming year. The survey also found that 83% of the exporters believed their unit prices would increase or remain unchanged. Furthermore, about 20% of the respondents indicated that they expect the sales of high-end items to increase in 2018, as overseas markets continue to improve.

Table: Growth Forecast for Hong Kong Exports
Table: Growth Forecast for Hong Kong Exports

Hong Kong’s electronics exports are likely to achieve sustained growth in 2018. According to an onsite survey at the 2017 Hong Kong Electronics Fair (Autumn Edition), 60% of buyers and 45% of exhibitors anticipated that their sales would increase in 2018, while only 3% of buyers and 8% of exhibitors were worried about a decrease. Emerging technologies, such as cloud computing, the Internet of Things, big data, artificial intelligence, wireless infrastructure, and so on are likely to boost the demand for semi-conductors (which account for more than 30% of Hong Kong’s electronics exports) and related parts and components. New technologies are likely to drive growth in Hong Kong’s electronics exports. Electronics products integrating with the latest technologies such as AR/VR applications and robotics are likely to prove very popular when they hit the market. Prospects for wearable electronics, especially those with smart home/smart living applications, remain positive. And electronics products for entertainment purposes are likely to do well in the coming year, with the imminent arrival of audio-visual items such as 4K Ultra HD TV, VR/AR headsets and gaming consoles.

The prospects for clothing exports, meanwhile, look less promising than those of other key industries. Relocation of clothing manufacturing from mainland China to other South and South-east Asian countries is likely to continue in the near term, given increasing operating costs in China and the transformation of the Chinese economy to one based on higher value-added industries. This shift in the global supply chain may mean Hong Kong will find it difficult to increase its clothing exports despite rising global demand. As regards demand for clothing, the development of fast fashion and simple style clothing will benefit lower-end exporters, while the higher-end market will also pick up when shoppers start to look for more fashionable items as their incomes rise.

Hong Kong’s exports of toys and games saw record growth in 2017, mainly because of increased sales of video games. Hong Kong’s toy and game industry is likely to continue to enjoy steady growth, boosted by technological innovations in electronics gaming. While the launch of VR/AR headsets, portable gaming console and so on, have created a new form of entertainment, toys and games integrating with the latest technologies will continue to do well too. Growth in Hong Kong’s exports of toys and games in 2018 is likely to be strongly linked to the sales performance of electronic gaming and the related products. As for traditional toys and games, the market in licensed products is expected to be busy, with a number of blockbuster sequels such as Avengers: Infinity War, The Incredibles 2, Ant-Man and the Wasp and Deadpool 2 scheduled for release. The demand for educational toys is expected to continue to rise given the evolving concept from STEAM to STREAM education, which emphasises the importance of science, technology, engineering, arts, mathematics and the addition of robotics. Hong Kong’s export statistics, however, cannot fully reflect the toy business, which is mostly offshore trade, with the bulk of shipments bypassing the city.

The export of watches and clocks is expected to pick up steadily in the coming year amid an improving external environment. In the high-end market, sales of luxury watches should hold steady. Fashionable watches will be in demand given the rise of the mix-and-match fashion style. Against the backdrop of a growth in health consciousness and online living, smartwatches with functions like fitness tracking, smart notifications and mobile connectivity are likely to remain popular. However, the more expensive smartwatches may face competition from the mid-range hybrid smartwatches, which provide the basic functions and features of smartwatches at a lower price.

The outlook for Hong Kong’s jewellery exports appears to be positive with steady growth. Demand for gold jewellery is expected to remain stable. Because of the sluggish price of platinum, platinum jewellery is expected to remain popular in developed economies as well as developing markets such as India. With the continuing improvement in the global economy, sales of fine jewellery are also likely to pick up as people’s purchasing power improves. Consumers may also look for more quality jewellery with good design and craftsmanship.

Content provided by Picture: Billy Wong
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