20 June 2012
A renewed downturn in the global economy and soaring production costs are among the major risks facing Hong Kong exporters
Given their sound economic fundamentals and monetary easing, emerging markets offer better prospects. Consumption will remain resilient in a number of markets, notably countries with huge domestic markets, including India and Indonesia.
A convalescing US economy should jump-start such export-dependent economies as Vietnam and Bangladesh, while Myanmar, which is beginning to liberalise its economy, offers promise as a base for garment and footwear manufacturing. The Middle East has been a star performer so far this year. But a renewed downturn of the global economy and soaring production costs are among the major risks facing Hong Kong exporters.
Priority market: the Chinese mainland will continue to promote domestic consumption (photo: EyePress)
Hong Kong exports in the first quarter of 2012 continued to be dragged down by sluggish demand from the US and the EU, where sales fell 0.1 per cent and four per cent, respectively. Exports to the Chinese mainland, the regional manufacturing centre, dropped by two per cent, while sales to Japan were buttressed by the country’s revival from the quake.
A continued rise in the unit value of Hong Kong exports, however, has mitigated the sales decline. Here the picture is complex: while consumer adherence to value-for-money has weighed on prices, rising input costs have added to export prices. Hong Kong exporters have not been able to pass all the cost increases to overseas buyers. For instance, crude oil and gold prices, with generally loose monetary conditions and mounting regional geopolitical tensions, managed to display hefty gains before recent corrections. In most cases, these price increases have translated into higher input costs and, hence, more expensive finished products.
Hong Kong manufacturers have faced even greater pressure from higher wages across the boundary. According to an HKTDC survey, 84 per cent of the respondents saw higher labour costs on the mainland in the second quarter of this year, compared with 86 per cent in the first quarter.
Coupled with expensive raw material, labour costs have continued to raise the unit value of Hong Kong exports – up 6.2 per cent in the first three months of 2012, on top of last year’s eight per cent rise.
With continuing uncertainty
In the US, recovery looks stronger and more resilient, with healthier economic indicators, robust corporate earnings, a strengthening job market and firmer consumption. Still-high joblessness will continue to temper consumer spending and maintain such recession-induced habits as back-to-basics buying and opting for low-cost outlets.
The EU’s lingering sovereign debt crisis renders it the most troublesome region. Only Germany, where exports continue to benefit from robust demand from emerging markets and domestic demand, remains resilient. Prospects there, however, are tinged by the debt problems of neighbouring countries.
Inevitably, political developments will galvanise the mood of pessimism in the EU. As a result, consumer confidence will likely remain fragile, and the appetite for imported goods weak. The fluctuating euro exchange rate will remain an uncertain element for Hong Kong exporters.
Despite a nascent recovery, Japan remains a complex market. As production supply chains have recovered from the devastating earthquake and the floods in Thailand, immense reconstruction efforts are providing an added boost to economic revival. Yet the Japanese economy will continue to face daunting challenges, from unstable electricity supply and higher energy costs, to a firm yen that suppresses export competitiveness.
The Middle East has been a star performer so far this year
In Latin America, such commodity exporters as Brazil, Chile and Peru should benefit from an expected rebound in commodity prices over the medium term. In Mexico, due to its close links with the US, growth is expected to gain from the pick-up of its giant neighbouring economy. More interesting, the December 2011 abolition of anti-dumping duties on a wide range of mainland-originated products is expected to enhance access of Hong Kong exports there.
In contrast, emerging Europe will remain a weaker region due to its close integration with the EU; economies marked by sound fiscal conditions, such as Poland, are likely to do better. Outside the EU, Russia is expected to profit from firming oil and commodity prices, while its imminent WTO accession should open new market opportunities. In addition to tariff reductions, Russia should follow international practices in such areas as customs administration, which will certainly facilitate sales to the country.
In the Middle East, Dubai’s role as a regional trading hub remains entrenched amid the political unrest in the region, luring buyers from as far away as Africa, where economic growth has rapidly picked up from a low base over the past decade.
Overall, the world trade environment is expected to remain difficult over the medium term. The biggest threat appears to be a renewed downturn, particularly in the EU. Based on that scenario, even developing Asia, where economic fundamentals are sound, could feel the squeeze from dwindling exports and lower investment.
For Hong Kong suppliers, making the most of new markets, including a few African countries, seems increasingly attractive.
For more on international trade trends, please see the June issue of the HKTDC Trade Quarterly, which can be ordered at: http://bookshop.hktdc.com/.