Summary

• Led by a drastic inventory drawdown by overseas buyers amid dwindling consumer demand, trading down and hence increasing price pressures, Hong Kong exports plunged 22% in the first quarter of 2009.
• Now that inventories are at very low levels, buyers have begun to place small orders to keep shop shelves from becoming empty, although overseas buyers have remained conservative.
• Given the worse-than-expected decline in world trade so far this year, however, Hong Kong exports are forecast to drop 10-12% in 2009, vis-à-vis the 6% decrease projected previously.
• While there is a pocket of optimism for a more stable external trade environment in the second half of the year, sales will only return to a normal growth path when a firm global economic recovery takes hold.

Hong Kong's export performance in 2009 has so far been worse than expected. Led by a drastic inventory drawdown by overseas buyers amid falling consumer demand, an appetite for lower-priced products and hence increasing price pressures, Hong Kong exports plunged 22% during January-March. Despite various relief initiatives against the global recession, reduced capital flows and trade credits, subdued asset prices as well as fragile business and consumer confidence have held back investment, production, consumption and import demand in Hong Kong's traditional markets.

While emerging economies have also suffered considerably from the financial turmoil, some of them, notably the mainland, have outperformed their counterparts due to their better economic fundamentals and less dependence on exports. Yet Hong Kong exports to the mainland have decreased substantially as such trade is dominated by semi-manufactures for export processing that may have crossed borders more than once and thus exaggerated the magnitude of declines.

Given the mundane demand from traditional markets, sales of semi-manufactures for export processing took a hard beating indeed. For finished products, luxury items like jewellery, expensive timepieces and high-end fashion have been particularly hurt. Likewise, exports of discretionary items like toys and consumer electronics are weak. But as consumers stay at home more, home-based activities are on the rise, and related items, such as video games and packaged foods, have sold relatively well.

Looking ahead, a global recovery will hinge on the normal functioning of the banking and credit systems, bottoming out of the housing market as well as a revival of business and consumer confidence. As the positive impact of various rescue initiatives becomes more apparent, there is cautious optimism that the world economy will bottom out in the second half of 2009, although unemployment will remain high for some time. Interestingly, the mainland is widely expected to be the first to recover from the global downturn. Its stimulus package, despite an investment focus, provides a tonic to consumption and in turn longer-term sales opportunities for Hong Kong suppliers.

All in all, Hong Kong exports should fare better during the second half of 2009 in line with a gradual rejuvenation of the global economy. With inventories at very low levels, buyers have begun to place small orders to keep shop shelves from becoming empty. But while there is a glimmer of hope for a more stable external trade environment, a marked turnaround will only materialise when a firm world economic recovery takes hold. For the whole of 2009, Hong Kong's total exports, dragged by the worse-than-anticipated decline in world trade so far this year, are now forecast to drop 10-12% in value terms, vis-à-vis the 6% decline expected previously.

Evidently, the biggest threat to the medium-term outlook of the world trade environment is a longer and deeper global recession than anticipated. The most serious risk is that the various stimulus initiatives worldwide will not suffice to bring about a sustained global recovery. There remains the risk of deflation amid the juxtaposition of dwindling aggregate demand, slackening commodity prices, weak labour conditions and restrained asset prices.

To sustain world economic growth over the long run, rebalancing the US and the emerging world, particularly developing Asia led by the mainland, will be the greatest challenge. Forced by de-leveraging, the US saving rate must increase, while the mainland has to prop up domestic demand. Yet maintaining relatively high savings in the US and raising private consumption on the mainland as the long-term growth driver remain a vision to be materialised.

Intensifying protectionism is another major threat to the medium-term global outlook. While G-20 leaders pledged in the London Summit to refrain from erecting new trade barriers during the current economic crisis, governments may increasingly be tempted to intensify protectionist action if the recession lingers. Even if the recession fades out, there is still concern that rising imports may fuel renewed protectionist pressures in order to guard the uncompetitive domestic industries.

The outbreak of human swine flu further presents a significant threat to the global social and economic landscape. Thus far, its social and economic impact has remained contained. Yet the virus has continued to spread around the globe. On a positive note, governments worldwide, with their experience in dealing with SARS and avian flu, are better prepared for a widespread contagion. However, if a full-blown epidemic materialises, the world economy will be badly hurt.

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