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Mid-year assessment:Market perspective on Hong Kong exports 2013

Despite increasing optimism, the world trade environment has remained challenging – with US growth dampened by fiscal tightening, the EU facing continued recession and persistent debt problems, and the Chinese economy slowing down in the first quarter. The external environment, though, is likely to improve somewhat over the medium term. In light of this, Hong Kong’s total exports are projected to increase by four per cent in value terms in 2013, a figure consistent with the previous forecast. There is a number of factors, though, that could have a negative impact on this sales outlook. Principal among these are the risks of a renewed downturn in the global economy, rising protectionism and sustained geopolitical tensions.

Export growth deceleration experienced in early 2013

Table: Summary of Hong Kong's external trade
 

Artificially boosted by a low comparison base, Hong Kong’s merchandise export performance in the first three months of 2013 was not too uninspiring. In contrast to the accelerating trend seen in the previous three quarters, though, sales growth slowed as automatic spending cuts kicked in in the US and sovereign debt problems once again flared up in the EU. The situation was exacerbated with China facing a tempered – albeit still enviable – economic expansion. Against this unenviable backdrop, Hong Kong exports still grew by four per cent year-on-year in the first quarter of 2013, compared with last year’s two per cent decline in the first quarter (admittedly followed by increases of two per cent in the second quarter, four per cent in the third quarter and seven per cent in the final quarter).

Table: Growth of Hong Kong exports by quarter
 

Market-wise, Hong Kong exports in the first quarter of 2013 were hampered by sluggish demand from traditional markets. Sales to the US and the EU, for instance, fell by one per cent and four per cent year-on-year, respectively. This decline, though, was more than offset by an impressive showing in the emerging markets. Intra-Asia trade was especially robust, a consequence of the region’s intensive production network and its continuing rise as a market for consumer goods. Sales to the Chinese mainland were particularly important here, rising by six per cent to constitute 55 per cent of Hong Kong’s total exports, and assuming the leading role in buttressing growth. Other emerging markets also proved fruitful, with exports to the Middle East up 15 per cent, emerging Europe 14 per cent, Africa seven per cent and Latin America seven per cent.

Table: Hong Kong's total exports by main destination
 

In the meantime, a slowdown in the growth of the unit value of Hong Kong exports (only edging up by 0.6 per cent year-on-year in the first quarter of 2013 as compared to a 3.4 per cent rise in 2012) further contributed to the deceleration in overall sales. Among the factors exerting downward pressure on export prices was sustained consumer frugality in overseas markets, particularly the more traditional markets. Softening oil and commodity prices, amid a stronger US dollar and concerns regarding the global growth outlook, proved another critical factor here. The recent slowdown in labour cost increases across the border, following rapid rises over the last couple of years, also played a part in suppressing export prices.

Chart: Increase in unit value of Hong Kong exports
 

Recent strengthening of the Rmb, however, has also exerted some upward pressure on export prices. After a brief relapse, the currency resumed its appreciation against the US dollar as of mid-2012. The Rmb has appreciated by more than four per cent since then, and by some 1.5 per cent so far this year. According to HKTDC’s survey findings, local production now accounts for 55 per cent of the costs of Hong Kong companies using Mainland manufacturing facilities. This means that a one per cent appreciation of the Rmb would translate into a 0.55 per cent increase in production costs, up from 0.5 per cent in 2009 and 0.3 per cent in 2006, with the actual impact varying across different industries.

Table: Share of local content of selected industries
 

A brighter outlook looming for the world trade environment

Looking forward, the global economy is expected to improve slightly during the course of 2013. As the EU continues to muddle through its debt crisis and while other developed economies contend with their own problems, traditional markets will remain on the slow track. Emerging markets, due to their stronger economic growth, currently offer better sales prospects for Hong Kong exporters. While the external environment will likely become more accommodating over the medium term, there is no lack of downside risks. These range from a renewed global downturn and heightening protectionism to sustained and deepening geopolitical tensions.

Chart: Output growth of advanced economies vs developing economies
 

Among the developed economies, the US looks stronger and more resilient. Notwithstanding its slower-than-expected expansion in the first quarter of 2013, the US economy will likely remain on a recovery trajectory. This will be nurtured by continued monetary easing, stronger employment, an improving housing market and gains in asset prices. That said, its deep-rooted fiscal problems will continue to weigh on domestic demand. Many recession-induced consumption habits, especially reverting to basics, searching for discounts and opting for low-cost outlets, will likely prevail over the medium term, although better-off shoppers are already showing considerably more willingness to spend.

Due to its protracted sovereign debt crisis, the EU remains the most compromised region. One bright spot, though, is Germany, a country that is increasingly benefitting from rising demand outside the EU, even though its near-term growth prospects are still blighted by its debt-ridden neighbours. Overall, fiscal tightening and weak Eurozone fundamentals will continue to cast a shadow over economic growth across the EU. This is despite the fact that the foundations for tackling the crisis, facilitated by continued monetary easing, are gradually falling into place. As a corollary, consumer confidence will remain weak, and any appetite for imported goods will likely be quite limited, with caution and frugality remaining very much the watchwords.

In Japan, its new stimulus policies – widely billed as “Abenomics” – should lead to a firmer recovery, despite continued tension between Tokyo and Beijing. Its aggressive monetary easing should keep the yen weak, boosting Japanese exports but also putting pressure on neighbouring economies, notably South Korea. The improving corporate and investment outlook is expected to boost both Japan’s labour market and consumer sentiment. Coupled with the recent surge in the stock market, this could buoy consumption in the short to medium term. A weak yen, though, will limit the country’s intake of consumer goods, even if stronger Japanese exports bode well for the import of industrial inputs.

While sales to traditional markets remain crucial, largely because of the sheer volumes involved, those Hong Kong exporters looking for business expansion are best advised to diversify into emerging markets. With regard to China, Asia’s economic juggernaut, its steady and more balanced growth will be supported by a larger budget deficit and by largely supportive monetary and credit policies. The country’s new political leadership has made industrialisation, informatisation, urbanisation and agricultural modernisation its priorities. It is expected that agricultural modernisation will support overall economic growth, while urbanisation will bolster domestic demand, bringing with it huge opportunities for Hong Kong suppliers.

As for other Asian economies, stronger demand from China will help quicken the pace of their own expansion. Significantly, trade between ASEAN and China will be further facilitated by the China-ASEAN Free Trade Area (CAFTA), which comprises a growing and consumption-minded middle class.While Hong Kong suppliers should target the new growth markets for consumer goods, notably Indonesia and, to a lesser extent, Vietnam, the rise of other low-cost production bases, such as Myanmar and Cambodia, is also likely to prove significant. Outside ASEAN, India, though a difficult market, remains a promising destination for Hong Kong exporters.

Elsewhere in the developing world, there is no lack of opportunities for Hong Kong exporters. If anything, resource-based economies should benefit from the expected firming of oil and commodity prices, all driven by abundant global liquidity, growing demand from emerging markets and continued geopolitical tensions. In Latin America, for instance, this should see its commodity economies – Brazil, Chile and Mexico – hold up well. It’s a similar story in Russia, where economic growth will benefit from sturdy oil and commodity prices, with its recent WTO accession bringing further market opportunities. Russia aside, emerging Europe will remain a weaker region, partly due to its close ties with the EU. Those economies with healthier fiscal conditions, such as Poland and Turkey, are likely to fare better.

In terms of the Middle East and North Africa (MENA), Dubai’s role as a trading hub will remain inviolate amid the social and political unrest affecting much of rest of the region, particularly Iran, Syria and Libya. For Sub-Saharan Africa, where economic growth will continue to accelerate from its low base over the past decade, Egypt, South Africa, Kenya and Nigeria, which comprise the “African diamond”, will remain the respective gateways to the continent’s northern, southern, eastern and western regions.

On the whole, the world trade environment is likely to enjoy some recuperation during the rest of 2013. While the lingering EU debt crisis remains a problem, the US is staging a gradual recovery and Japan looks set to regain a certain momentum. The Mainland economy, though shifting to a lower gear, is also maintaining a steady and balanced growth. Sturdy expansion among the other emerging economies is another hugely reassurring and positive factor.

Capped by a higher comparison base, however, Hong Kong exports look likely to expand at only a modest pace throughout the remainder of the year. Taken together, Hong Kong’s total 2013 exports are expected to grow by four per cent in value terms, a figure unchanged since the forecasts made last December. Hopefully, Hong Kong exports will strengthen somewhat next year, but only if the external environment becomes more stable.

Likely downside risks for the medium-term outlook

Renewed downturn of global economy

The biggest threat to the medium-term export outlook is still a renewed downturn in the world economy, one likely to be caused by the EU debt crisis and the problems in other mature economies. After a deceptive lull, the Cypriot bail-out episode and the Italian political impasse both served as a reminder of the fragility of the Eurozone. The German elections in September only add to the uncertainty surrounding the region. Given the EU’s fragile economic standing, any major shock in the Eurozone could bring calamity to the whole region, with profound effects on the global economy and the world’s trade environment. To compound matters, the fiscal and debt problems in the US have yet to be resolved, with further political squabbling seemingly unavoidable. If no long-term solutions are found, there is a risk that the current US recovery will be derailed, creating another challenge for the global economy.

Undercurrent of overseas protectionism

The emerging spectre of overseas protectionism may prove another hindrance to any global recovery. While trade restrictions are yet to be widespread, protectionist pressure has risen in the traditional markets of both the US and the EU. It is also being seen in a number of the emerging markets, notably Argentina and Brazil. As well as the traditional restrictive measures, typically anti-dumping, countervailing, safeguards and tariff increases, there are increasing concerns about a currency war being triggered by the sharp depreciation of the yen. Suggesting the possible pursuit of competitive devaluations around the world, South Korea, as well as Australia, Europe and India, has cut interest rates to boost its exports. Such ‘beggar-thy-neighbour’ policies could eventually undercut global trade growth. Hong Kong exports, already suffering from a strong Rmb, could prove particularly vulnerable.

Sustained geopolitical tensions

Geopolitical developments may also incite trade tensions. A case in point is the territorial dispute between China and Japan. Further deterioration of bilateral relations could translate into genuine economic damage to both countries. The spillover to regional supply chains will likely be high, as Hong Kong re-exports of origin, other than those of Japan and China, may also be affected. In addition, the prospect of regional instability over the Korean Peninsula also dims the medium-term export outlook, while any intensification of the ongoing unrest in MENA may lead to spikes in crude prices, which will potentially suppress overseas demand and substantially raise production costs.

Other threats and challenges

Apart from economic and geopolitical factors, there exists several additional risks and challenges. For one, there are sustained concerns about the outbreak of a new strain of avian flu (H7N9). As currently there are no indications of human-to-human transmission and the spread of H7N9 is restricted largely to the Chinese mainland, the ensuing social and economic impact has been limited. If H7N9 ever looks set become a widespread human flu, however, the world economy will inevitably be affected, with trade and financial linkages ultimately compromised. Last but not least, security issues are another major threat. The recent Boston Marathon bombing is clear proof that the problem of terrorism remains unabated, once again casting dark clouds over global economic and trade prospects.

Content provided by Picture: Daniel Poon
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