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Hong Kong Export Prospects 2015: Progress against Continued Headwinds video

Against a backdrop of sustained headwinds, Hong Kong exports are obliged to contend with an internationally moderate and uneven growth environment. While the US economy looks set to gain further traction in 2015, the EU and Japan are likely to remain fragile. Growth prospects for the emerging economies will also be mixed, with developing Asia remaining the best performing. Economies largely reliant on exporting natural resources will be hampered by subdued oil and commodities prices, while the diverging monetary policies among the major central banks worldwide will also remain threat to global financial stability. That said, Hong Kong exports should still benefit from an anticipated – but small - improvement in the world economy, one expected to render a 3% increase in value in 2015.

Improving sales performance in 2014

Notwithstanding continued challenges in the world trade environment, Hong Kong exports continued to edge up in the first 10 months of 2014. After a 3.6% rise in 2013, exports grew at a faster rate of 3.8% year-on-year during this period. The sluggish start was due mainly to the weak US demand induced by severe weather conditions. The better performance was attributable, in part, to a larger increase in the unit value of Hong Kong exports. They increased by 1.9% year-on-year during January-September 2014, against a 1.3% rise in 2013. This was largely a reflection of elevated commodity prices, not least with regard to oil, in the first half of the year.


Table: Summary of Hong Kong external trade
Table: Summary of Hong Kong external trade


Apart from in Japan, where consumer appetite was dampened by the 3% hike in sales tax imposed from April 2014, Hong Kong exports to its traditional markets remained inspiring. Sales to the US have strengthened as the impact of the severe winter receded, while the EU recovery – though a slow and bumpy one – has bolstered import demand. More importantly, intra-Asia trade was supportive, given the region’s extensive production network and, increasingly, its rise as a consumer goods market. Outside developing Asia, other emerging markets fared even better, with exports to emerging Europe up some 10%, Latin America 10%, the Middle East 23% and Africa 34%.


Table: Hong Kong total exports by main destination
Table: Hong Kong total exports by main destination


Product-wise, helped by the introduction of new mobile phone models, electronics remained the main driver of growth, up by more than 6% year-on-year during January-October 2014 and constituting around 60% of Hong Kong’s total exports. Household electrical appliances, however, suffered from increased competition from indigenous mainland enterprises. More worryingly for the clothing sector, exporters have been exposed to other fledgling suppliers across Asia, not to mention their counterparts on the mainland. Toys appeared to be an even bigger loser. It should be noted, however, that Hong Kong’s trade figures understate its toys business, as a substantial amount of related cargo is shipped directly to overseas markets from the mainland, without passing through Hong Kong. Meanwhile, jewellery and timepieces, which showed meager to modest increases, were among the other winners, alongside electronics.


Table: Hong Kong total exports by selected industry sector
Table: Hong Kong total exports by selected industry sector


Continuation of an uneven world recovery in 2015

Despite the sustained headwinds, the global economic recovery should continue, but it will remain modest and uneven in 2015. The US rebound is expected to stay on track, while the EU is likely be the biggest drag on global growth. The sustainability of Japan’s revival is another cause for concern. If anything, the downward trends in commodities prices, especially for oil, will be a plus for world growth, as consumer economies, such as the US, Japan and most parts of Europe will benefit. Commodities exporters, such as Russia, Brazil and oil producers in the Middle East, however, will be at a disadvantage. Given the fragile economic environment, consumer frugality should prevail, with importers and retailers maintaining their cautiousness in terms of order size, lead-time and pricing. Evidently, the recent umbrella movement protests in Hong Kong have yet to show any lasting impact on the order placement and sourcing practices of overseas buyers.


Chart: Output growth of advanced economies vs developing economies
Chart: Output growth of advanced economies vs developing economies


Among the developed economies, the US is expected to lead the pack. Its growth momentum will be largely underpinned by falling unemployment, steady payroll gains, an improving housing market, better household balance sheets and stronger consumer confidence. Although the Federal Reserve has pledged to keep interest rates low for a considerable time, financial market stability will remain a matter of considerable uncertainty, given the challenge to manage unprecedented liquidity amid incompatible monetary policies of the major central banks worldwide. The Republican victory in the US midterm elections may also cast a shadow over the administration of President Obama, even though the Republican-controlled Congress may provide a better environment for advancing trade liberalisation.  The Republicans are generally more business-friendly, and trade appears to be an area of common ground for moderate Democrats and Republicans.

On the other side of the Atlantic, the EU recovery – despite the generally diminished sovereign debt crisis in view of relaxed monetary policies, a modest fiscal consolidation and structural reforms in a number of countries – will remain constrained by high joblessness, tight budgets and sustained deleveraging pressures across the Eurozone. The Russia-Ukraine crisis is taking a further toll on EU growth. Even Germany, the one bright spot over the last few years, has been hampered by spillover effects from the EU sanctions on Russia. So, while the European Central Bank is expected to unveil further policy initiatives aimed at propping up growth, consumer confidence is unlikely to improve significantly. The UK, however, should see more solid growth momentum outside the Eurozone, as demand will be reinforced by improving employment and a strong property market.

In Japan, Abenomics will enter a critical phase in 2015, as the early recovery momentum unleashed by aggressive monetary easing and fiscal stimulus will need to be sustained by structural reforms. A rise in the consumption tax rate – from 5% to 8% in April 2014 – has put pressure on consumer spending, and in turn delayed the next 2% hike scheduled for October 2015. Worse still, a weak yen, bolstered by the Bank of Japan’s aggressive expansion of stimulus, will undermine the country’s imports of consumer goods, although exports incited by enhanced price competitiveness may bode well for its intake of industrial inputs.

For their part, the emerging economies will generally grow at a sturdy pace in 2015, even though many of them are likely to be affected by the expected capital market volatility induced by a tighter US monetary stance. Most emerging markets, however, should be able to cope with the ebb and flow of capital, given their solid current account positions, sizable international reserves and more manageable external debts. In addition, stronger demand from the developed economies will also stimulate imports from the emerging economies.

Developing Asia will remain the most dynamic region in the world, although its prospects may be overshadowed by political uncertainties and geopolitical tensions in some areas. For the Chinese mainland, growth will shift into moderate gear in pursuit of a more sustainable and balanced expansion. While the Chinese government is likely to accept a lower growth rate, stimulus measures are expected to be introduced to sustain the momentum of the economy. In the longer term, there may be further economic reforms and liberalization. This may include the adoption of free trade zone reforms, outside of Shanghai, to facilitate economic upgrading and greater integration within the global economy, leading to increased efficiency and productivity. Meanwhile, increased urbanisation will bolster domestic demand, presenting new opportunities for Hong Kong.
For other Asian economies, sustained demand from the Chinese mainland and further recovery in the US should support their growth. The launch of the ASEAN Economic Community by end-2015 is further expected to stimulate regional integration and economic growth. This single market of more than 600 million people will facilitate the movement of goods, services, capital and labour, and will create opportunities for companies both within ASEAN and outside of the region. Hong Kong companies, in particular, could benefit from the new growth markets for consumer goods, not least Indonesia. The rise of new low-cost production bases, notably Myanmar, is also noteworthy. For its part, Vietnam remains an important market and production base, as the negative impacts of the anti-Chinese riots have faded. Outside ASEAN, India is another promising market, in light of the economic stability and accelerated reforms being instilled by its new government.

Elsewhere in the developing world, there is no shortage of opportunities for Hong Kong companies. In Latin America, the outlook for resource-rich countries is largely tainted by slackening commodities prices amid slower than expected growth in demand, increasing supply and a surging US dollar. Yet Brazil, clear of political uncertainties after the presidential election, should see steady economic growth in the coming years. It is also expected to benefit from hosting the 2016 Summer Olympics, learning from the experience of playing host to the 2014 World Cup, which failed to impart substantial economic stimulus. Mexico, thanks to its close links with the US, stands to piggyback on the continued pick-up in the American economy.

In emerging Europe, the halting recovery in the EU will nonetheless provide some impetus for regional growth. Poland, Hungary, the Czech Republic and Turkey, for instance, are well-positioned to capitalise on the painful convalescence of the EU. Russia, on the other hand, is adversely affected by the uncertainties and tensions stemming from the Ukrainian crisis, a development only further exacerbated by shaky oil and commodities prices.

As for the Middle East and North Africa, sustained oil production and government spending should support growth in the oil-exporting countries despite the softening crude prices. However, ongoing political unrest and military flare-ups in the region will remain matters of concern. Hong Kong exporters should, therefore, leverage on Dubai’s entrenched role as a regional trading hub, to attract buyers from as far afield as Africa, as it will continue to benefit from rising capital and investment inflows.

Lingering risks and challenges

Deflationary pressure poses a threat to the Eurozone. Stubbornly high unemployment and heavy indebtedness continue to weigh on incomes and place a heavy strain on economic recovery. These factors inhibit demand and aggravate the deflationary trend, with the fallout from the Russian-Ukrainian crisis making matters worse. 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 trading environment. The spectre of a renewed downturn of the Japanese economy will only add to concerns.

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 also likely to remain volatile. These volatilities could put a considerable strain on those emerging markets with large external financing requirements. Conceivably, any unexpectedly rapid normalisation of the US monetary stance is likely to result in financial market instability, and have repercussions around the world.

The APEC Summit held in Beijing recently breathed new life into efforts to further liberalise world trade, by reaching an understanding to reduce tariffs under the existing WTO Information Technology Agreement and sealing a deal to break the deadlock over the implementation of last December’s WTO Trade Facilitation Agreement. Exchange rate vagaries, however, could raise volatility in the foreign exchange markets. In particular, there are increasing concerns over the likelihood of a currency war being triggered by the rekindled depreciation of the yen. Moreover, the possible pursuit of competitive devaluation around the globe could eventually undercut world trade growth.

In addition, APEC’s roadmap for promoting the Free Trade Area of the Asia-Pacific (FTAAP) notwithstanding, the proliferation of regional trade agreements (RTAs) may yet prove another hindrance to Hong Kong’s export outlook. While the ever-expanding number of rules and regulations resulting from the various RTAs is difficult for exporters to navigate, the real threat is that these RTAs may directly and deliberately discriminate against non-signatories. This may be the case with the 12-member Trans-Pacific Partnership (TPP), spearheaded by the US. Its signatories together account for 38% of world GDP and 26% of global trade.

Last, but not least, geopolitical uncertainties may also cloud trade prospects. In the Middle East and North Africa, political unrest and military conflicts continue in several countries, especially Libya, Syria and Iraq. In addition, the crisis in Ukraine is threatening not only regional stability and economic growth in Russia, but also the recovery outlook of the EU. Territorial disputes in the East China and South China seas, tensions in the Korean peninsular and socio-political uncertainties in Indochina also continue to pose a threat to regional stability and trade flows. Meanwhile, the Ebola outbreak in West Africa may also risk damaging economies in the region, while disrupting bilateral trade with the rest of the world.

A mixed outlook for Hong Kong exports

Despite sustained headwinds, Hong Kong exports should still benefit from the anticipated small improvement in the world economy, a development due in part to softening oil and commodity prices. Dwindling prices for raw materials, coupled with continued consumer conservatism, should ease the upward pressure on the unit values of Hong Kong exports. In value terms, Hong Kong exports are expected to grow by 3% in 2015, a muted moderation on the 2014 pace. In volume terms, Hong Kong exports are projected to expand by a faster rate over the preceding year, a testament to stronger overseas demand for a number of products in areas where Hong Kong has long been successful.


Table: Growth forecast for Hong Kong exports
Table: Growth forecast for Hong Kong exports


Electronics, which account for some 60% of Hong Kong’s total exports, will remain the engine of growth amid the prevalence of smart devices, especially for consumer wearables. According to an onsite survey at the Autumn Electronics Fair, 92% of buyers and 90% of exhibitors expected that their sales would remain unchanged or increase for 2015. These percentage shares were higher than the 86% of both buyers and exhibitors polled at the Spring Electronics Fair who said they expected business to improve or remain unchanged for 2014. While household electrical appliances will have to contend with challenges from indigenous mainland exports, lighting products should fare better.

In terms of clothing, sales should fare better than in 2014, in tandem with the shaky revival of the global economy. Consumers are gradually resuming spending on fashionable items, but the spotlight will likely stay on products that offer comfort, function and value-for-money. Ever-rising production costs on the mainland are also driving the quickening trend towards a decentralised model for manufacturing and sourcing. As a result, this will continue to deter overseas clothing orders. In this regard, the rise of a number of emerging production bases, such as Bangladesh, Indonesia, Vietnam, Cambodia and Myanmar, will continue to pose new challenges to Hong Kong’s clothing exports.

To a certain extent, improving economic conditions in overseas markets will also stimulate toy sales. Although the booming online games market remains a huge and growing competitor, smart toys and educational playthings are much sought after. On the supply side, with Hong Kong manufacturers deemed more capable of meeting the stringent overseas regulatory requirements on toy safety, the relocation of production and sourcing from southern China to other production bases is less likely. However, Hong Kong’s export statistics cannot fully record Hong Kong’s toys business as it mostly takes the form of offshore trade, with shipments bypassing Hong Kong.

Timepieces, for their part, will be a beneficiary of any upturn in the global market. The sales of higher-end items are projected to perform somewhat better on the back of a healthier consumer appetite, while demand for less expensive items, such as fashion watches, should hold up well amid the general stickiness to cost-conscious spending. Spurred by the growing popularity of wearable technology, there are also decent sales prospects for smartwatches that can link up with a smartphone, track a person’s movements and measure vital signs.

As with timepieces, consumer demand for jewellery will become stronger as the global economy rides out the headwinds. While likely to secure more orders, Hong Kong exporters will have to struggle with the fluctuating costs of precious stones and metals, especially of bullion, given the diverse monetary policies of the major central banks worldwide. These vicissitudes in raw material prices will be a major element of uncertainty that exposes the jewellery sector to particular risks and challenges.

Content provided by Picture: Daniel Poon
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