Hong Kong Economy: The Policy Dilemma
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The latest indicators showed steadying of economic conditions - the decline in exports and retail sales abated, unemployment rate stopped climbing and deflation remained mild in August.
Looking forward, the global economy is expected to gradually recover, but the pace of expansion will be tepid. The highly trade-reliant Hong Kong economy is not likely to make big gains, as it will no longer be easy selling to US consumers who are becoming more frugal, and domestic demand may not be able to push growth to decent levels.
Major central banks have recently announced to scale back some of their emergency credit programmes, making the first of many steps that they are likely to take to reduce monetary stimulus as financial markets stabilise after the financial meltdown, signaling an end to further easing. However, the fragile global recovery would prevent policymakers from a shift towards outright tightening anytime soon.
Excess liquidity has fuelled a rally in global stocks and rising property prices in a number of Asian economies including Hong Kong. Currently, the biggest risk is that investors bet on excess liquidity to stay longer, taking asset prices higher and thereby increasing the risk of a bubble-burst double dip recession. |
Decline in Retail Sales Abates
August retail sales fell 1.0% in volume, improving sharply from the 5.2% decrease in July. In value terms, retail sales dipped merely 0.2% during the month.
The sales of luxury items such as jewellery, watches and clocks grew 3.2% in volume on the back of a rising number of tourists. The sales of durable goods also improved to a drop of 4.9% in volume from a decline of 9.4% in the previous month, as the positive wealth effects from the booming asset markets lifted consumer confidence and boosted local spending.
Going forward, the high unemployment rate, uncertain job prospects and falling income are likely to keep consumers cautious in spending. But a gradual improvement of the local economy, coupled with rising asset prices should render support to consumer confidence. As such, we see retail business revert to an uptrend, with an average growth of about 1% in the coming months. We have thus revised up the 2009 retail sales forecast to a contraction of 3% from an initial estimate of a decline of 5%.
Exports Improve Slowly
Hong Kong's total exports dropped 13.9% in August, a slight improvement from the 19.9% decline in July.
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