• Amid the financial tsunami, Hong Kong's merchandise exports will likely falter in 2009. Total exports are projected to decline by 6%, with domestic exports and re-exports falling by 20% and 5.5%, respectively.

• Despite the multibillion-dollar rescue measures of various governments and authorities, the global economy will remain in the doldrums. The outlook for traditional markets is especially gloomy.

• Developing economies are not immune to the financial tsunami, either. Yet economies with stronger fundamentals, or countries with sustainable domestic demand will likely fare better.

• In this context, Hong Kong companies should diversify to selected emerging markets, and the mainland looks set to be the most promising one in view of the global downturn.

• For traditional markets, Hong Kong exporters should note the trend of trading down, focusing on competitively priced products that are stylish, safe and environmentally friendly.

• Service exports will be lacklustre to mirror the inevitable faltering in merchandise exports, with broad-based declines expected.

• Financial services exports, after having shown strong growth over the past three years, are suffering as the global financial tsunami hits directly Hong Kong's equity fund-raising and other financial activities.

Major Setback in Traditional Markets Amid Financial Tsunami

The world economy is on the brink of recession amid eruption of the global financial tsunami. Led by the bankruptcy of Lehman Brothers on 15 September, unfolding developments have indicated that the US financial crisis is far from over. The crisis has spread to Europe and then around the globe rapidly. Despite the concerted multibillion-dollar capital injections and various rescue initiatives offered by governments and relevant authorities worldwide, troubles in financial markets will not die away anytime soon. While all these efforts should help stabilise markets, convalescence of the global financial system will be long and taxing.

Prompted by sustained tight credit conditions and continued housing market adjustments, along with their knock-on effects on different economic activities, a significant downturn of the world economy is already underway. As the financial tsunami takes its toll, the outlook for the US and the EU is particularly gloomy. Even in Japan, where the banking sector only has limited US exposure, economic prospects are overshadowed by the financial tsunami and its fallout. In all, the traditional markets will likely remain lacklustre in 2009.

Trading Down Becoming Tenet in Traditional Markets

Given the economic headwinds, the long-running consumption spree in traditional markets, especially the US and the EU, has subsided, with consumer confidence hitting an all-time low. Consumers, generally faced with tight credits, plunging home prices, tumbling investments, rising joblessness and sagging wage growth, are putting a brake on their spending. Notwithstanding appearance to the contrary, the higher-end segment will be particularly affected, as the repercussions of the financial tsunami have even reached the very wealthy class.

Product-wise, luxury items such as jewellery and high-end fashion will be mostly affected, while amid the housing slump, related items like furniture, household products and electrical appliances will sell less well. Sales of discretionary items like toys, watches and consumer electronics are also expected to be weak, and the demand for computers will be further impaired by dwindling ICT investment worldwide. Increasing consumer cautiousness, on the other hand, will stimulate an appetite for cheaper products. Not surprisingly, the sales outlook for competitively priced products that are stylish, safe and environmentally friendly, where Hong Kong exporters are in their element, looks set to be a tad more encouraging.

Emerging Markets - No Decoupling from Global Downturn

Apparently, developing economies are not immune to the financial crisis. While falling demand from traditional markets will dampen exports of emerging economies, a contraction of foreign capital inflows will also take its toll. Yet some emerging economies are expected to outperform most developed economies and their weaker counterparts in the developing world. Sound fundamentals of some economies, particularly current account surpluses, large exchange reserves and high domestic savings, should help them cope with the global slowdown in general and a dwindling demand from developed markets in particular. So the prospects for Hong Kong exports are not completely bleak in the developing world.

The economic performance of different emerging markets as well as their import absorption power will somewhat hinge on their dependence on exports as a stimulus to growth. While export-oriented economies will be more affected by the global downturn, economies with stronger economic fundamentals, or countries with sustainable domestic demand, notably the mainland, will be better insulated. Commodity exporters may also have better market potential, as the accumulated windfalls over the past few years have boosted their economic health considerably.

Mainland as a Cushion against Global Downturn

Dragged by the fallout from the financial tsunami, the Chinese mainland is likely to grapple with an economic slowdown. Yet it will remain in the spotlight as the largest single growth driver in the Asian region. While mainland exports will moderate amid cooling global demand and sustained production costs, the government, endowed with the largest foreign reserves worldwide, is well poised to adopt stimulus measures to counteract the negative external shock. Consequently, infrastructure investment, now targeted by the government as the impetus to growth, will stay strong.

In particular, the government has announced a RMB4 trillion stimulus package, which runs until end-2010, to bolster domestic demand. Even with slower economic growth, the mainland thus holds the best promise among all important markets for consumer goods. Indeed, sustained economic development, high savings ratio and a middle class of over 200 million inhabitants, alongside stimulative public policies, should lead to a huge demand for a wide array of consumer goods. As a result of the adjustments in the property and stock markets, some wealthy mainland consumers may shy away from lavish spending. Instead, they may be inclined to purchase Hong Kong's mid-end products.

Implications for Hong Kong's Merchandise Exports

With the increasingly fragile business and consumer confidence in traditional markets, many Hong Kong exporters are suffering from order cancellations, falling new orders, escalating price pressures and growing receivable problems. Although the US, the EU and Japan together account for about 30% of Hong Kong's total exports, these three major traditional markets constitute an overwhelming 60% share of Hong Kong's exports of consumer goods. Considering the focus of Hong Kong manufacturers on consumer goods, any downturn in exports to these traditional markets will have more serious implications than relevant figures reveal.

Against this background, Hong Kong exporters are likely to take a conservative approach in 2009. They are expected to reduce marketing and advertising expenses, take fewer trips, and find more effective ways of promotion. As there will likely be lower R&D expenses, they are expected to introduce fewer new products, probably focusing on competitively priced mid-end quality items that may be better received as consumers trade down. With no aggressive business plans, expansion or relocation of production base is likely to be deferred. But Hong Kong exporters will continue to diversify markets, striving to explore emerging markets, the Chinese mainland in particular, to take up somewhat the slack in traditional markets.

Development of Hong Kong's Services Exports

The global financial tsunami has already precipitated an economic downturn that is expected to be long and substantial, shaking consumer confidence and sapping spending in both developed and developing economies. Hong Kong's merchandise exports will predictably falter in 2009. Since Hong Kong's services economy is closely intertwined with its trading and manufacturing sector, it will be hard for Hong Kong to escape the fallout of the financial tsunami.

First of all, the finance sector is hit directly, as reflected by the stronger inclination to preserve capital amid heightened concerns over bank runs and failure of financial institutions. The deepening liquidity problem has not only affected the financial sector for its funding activities, but also the refinancing plans of many companies outside the financial sector, typically the trading and manufacturing sector. In addition, as interests in IPOs drop, demand for legal and accounting services will also be affected. Offshore trade receipts will decline as well, with the Chinese mainland facing a less promising external environment

Hong Kong's transportation and logistics sector will be hard hit by a weaker trade and the reduction in cargoes. As the demand for time-sensitive delivery declines, Hong Kong's competitive advantage of logistics efficiency would be rendered less relevant. Generally, services suppliers outside the finance and trade sector will also be greeted with reduced export demand. For instance, dwindling property sales on the Chinese mainland, by far a major services market of Hong Kong's IRES sector, will bode ill for related services demand, while corporate downsizing in general points to lower spending on ICT, legal, accounting and consulting services, and in this connection, softer exports of these services to overseas markets.

Despite the prevailing conservatism in business and personal spending, Hong Kong's services suppliers should focus on and diversify into markets with greater resilience, such as the mainland and Middle East. Meanwhile, in the midst of the market downturn, users of services that are aiming to capture a bigger slice of the market are likely to strengthen their company's branding, thus whetting an appetite for advertising and various kinds of design services. On the other hand, they will become increasingly selective and cost-cautious, and competition with other foreign and local service suppliers will further intensify in terms of price, quality and delivery efficiency.

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