Not a year for undue pessimism, but 2012 will certainly be one for recognising an undistinguished global environment that will be the lesson for most Hong Kong traders and manufacturers. As the aftermath of the financial tsunami continues to take its toll, the world economy is expected to see hesitant growth, and Hong Kong exports should just expand slightly in value. To be sure, emerging markets will fare better. But sales to this part of the world, which are also expected to moderate, will be unable to compensate for the poor showing of traditional markets.
The US: Subdued growth with great uncertainty
In the US, the economy will be hindered by high joblessness and the lacklustre housing market. Barring any shocks arising from political haggles, subdued growth may still be feasible on the back of continued monetary easing. But poor income prospects and household deleveraging will weigh heavily on domestic demand. With consumer confidence further impaired by repercussions of the European sovereignty debt crisis, many recession-induced buying habits will likely prevail. In all likelihood, consumers will continue to go back to basics, and the sales outlook for competitively priced products that are stylish, safe and environmentally friendly appears to be more encouraging.
Consumer confidence in the US
Source: The Conference Board
Apart from economic factors and consumer trends, economic and trade relations between the US and the Chinese mainland in the run-up to the American presidential election in November 2012 will have an important bearing on Hong Kong exports. With “China-bashing” rhetoric coming into play again, the currency issue is expected to remain a particular thorn besetting Sino-US trade relations. Any continued appreciation of the RMB against the US dollar will further erode the price competitiveness of Hong Kong exports, which are mainly manufactured on or sourced from the mainland.
Clothing, already plagued by soaring production costs on the mainland, will be among the major victims of a strong RMB. To lower costs, US retailers and importers will strive to source their merchandise from other sources. While the export outlook is austere, sustained preference for value-for-money bodes well for the sales of chic casual wear, as well as basic items that offer comfort, function and environmental friendliness. Likewise for toys, US consumers, product safety aside, will still focus on value. With getting back to basics staying as the creed, lower-priced traditional toys should fare better. Moreover, a few upcoming movies, such as Star Wars 3D and Beauty and the Beast 3D, should whet an appetite for licensed toys, which are mostly traditional toys.
For consumer electronics, there is a rising green awareness apart from product safety. While the federal government has been slow in addressing environmental issues, US states are compelled to fill the gap by rolling out related measures. Coupled with the focus on value, the green trend will maintain the spotlight on low-priced and energy-efficient models. That said, demand for digital gadgets like smartphones and smart TVs, though slowing a tad, should remain relatively resilient. For household electrical appliances, sales prospects are overshadowed by the anaemic housing market and mounting competition from indigenous mainland enterprises.
As for jewellery, Hong Kong exporters are expected to face continued troubles caused by sustained prices of precious metals, stones and diamonds. More disconcertingly on the demand side, consumer appetite for jewellery will again be impaired by the shift away from lavish consumption. Shaky sales performance, especially in volume terms, is therefore plausible. Similarly for timepieces, exports of higher-priced items should remain weak. But in line with the current trend, less costly items, probably alongside models with a back to basics feel, are expected to outperform others. Sales of lower-end items, however, will be constrained by competition from indigenous mainland suppliers.
The EU: Prospects clouded by debt crisis
Clouded by the loitering debt crisis, the EU is on the brink of another recession. Only Germany is in relatively good shape, but its prospects are gravely darkened by the persistent high joblessness, shrinking demand and massive debt of neighbouring countries in Southern Europe. Outside the eurozone, prospects for the UK are also uninspiring, as its beleaguered housing market continues to cast a pall over the economy. On the whole, the austerity drive to contain debt and fiscal imbalances will invigorate consumer pessimism across the EU. As a result, consumers are likely to remain conservative, with value for money being the catchphrase. To add to the woes, the fluctuating exchange rate of the euro will be an uncertain element for Hong Kong exporters.
Consumer confidence in the EU
Note: The index lies between -100 and 100, where readings below 0 indicate pessimism
Source: Eurostat
Hong Kong exporters will be further affected by regulatory changes in the EU. While anti-dumping duties against imports from the mainland have long been a common feature of its trade policy, the imposition of anti-subsidy duties constitutes a new development. The recent first-ever anti-subsidy case against imports of coated fine paper from the mainland is a clear indicator of the EU’s continued tough position and the possibility that it may make broader use of anti-subsidy duties in the future. In addition to trade measures, regulatory requirements in relation to health and environmental protection are noteworthy.
Environmental protection will assume a vital role in electronics and household electrical appliances. For instance, the WEEE Directive, which is part of the waste management laws, and RoHS, which restricts the use of hazardous substances, will be toughened up to increase producer responsibility and market surveillance. Regarding product trends, basic and energy-efficient models will still be sought after, while sales of electronic gadgets are expected to be stable. Meanwhile, exports of household electrical appliances will likely be capped by the mundane property sectors in certain member states and fierce competition from indigenous mainland enterprises.
For toys, with product safety concerns high on its agenda, the EU has tightened the Toy Safety Directive, and member states have been required to implement the stipulated provisions from July 2011. While complying with regulatory changes, Hong Kong exporters should be acquainted with the EU product trends, which have become more similar to the US, despite its greater favouritism towards basic toys. For clothing, exporters may also be burdened by various safety and green regulations, aggravated more seriously by increasing EU imports from other sources due to high production costs on the mainland. On the demand side, the emphasis on basic essentials should stay, reflecting a desire among consumers for classic looks.
As regards timepieces, the EU will stay as a fairly mature market, focusing on quality but value-for-money models. Compared with their US counterparts, European consumers are relatively traditional, having a penchant for watches with fashionable designs for formal as well as casual occasions. Concerning jewellery, shoppers in general, owing to their cautiousness, will stick to less pricey articles marked by good quality and craftsmanship rather than flashy brands. Mimicking the US, sales in value terms should perform better than volume turnover, given higher unit prices amid still-expensive precious metals, stones and diamonds.
Japan: Tepid recovery amid reconstruction
Developments in Japan are scarcely better than in the US and Europe. As the country’s manufacturing supply chains have almost fully recovered from the disastrous earthquake, tsunami and nuclear fallout, massive reconstruction efforts serve to give an added boost to economic revival. Yet the Japanese economy will continue to face daunting challenges, spanning from unstable electricity supply and higher energy costs, as more expensive fossil fuel is used as more nuclear reactors become idled, to the yen’s persistent appreciation, a gloomy export environment as well as the newfound supply chain disruption due to the floods in Thailand.
Consumer confidence in Japan
Note: The index lies between 0 and 100, where readings below 50 indicate pessimism
Source: Japan Cabinet Office
As reconstruction efforts will have to take hold to have the impact trickle down to the domestic front, in particular infrastructure and housing, consumer sentiment tends to rebound significantly. The recovery in consumer confidence, however, will likely be held back by the challenges facing the economy. Sustained economic hardship will continue to spark a backlash against unbridled consumerism, although consumption in disaster areas will be propped up by reconstruction demand. Hence, cautiousness will remain the buzzword for most Japanese shoppers. To some extent, the strong yen may facilitate sales of consumer goods. But this currency movement is not conducive to Japanese exports, thereby suppressing the sales of Hong Kong’s parts and components.
Chinese mainland: Still in the spotlight
Facing the knock-on effect of the global downturn, the 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. Notwithstanding the headwinds from developed economies, the mainland is still expected to demonstrate commendable growth. While mainland exports will slacken amid softening world demand and sustained production costs, lower inflation and a weaker property market should set the stage for relaxing its tight fiscal and credit policies, therefore imparting a much-needed stimulus to the economy.
GDP, exports, retail sales and investment growth in China
Source: National Bureau of Statistics of China
Most importantly, the mainland’s 12th Five-Year Plan should provide an added impetus to growth, especially opening up new opportunities for Hong Kong. The Plan foresees economic growth driven more by domestic demand than by exports and inward investment. In the process, although wage rises are expected to lead to higher costs of doing business on the mainland, it will mean greater absorption power and better appetite of Chinese consumers, offsetting in part the lethargic demand for materials and semi-manufactures due to slowing mainland exports. Hong Kong, as a brand showcase and trendsetter, will surely benefit from a growing and increasingly sophisticated mainland consumer market.
In addition to rising consumption, Hong Kong should further benefit from the national focus on accelerating urbanisation and the consequent development of service industries, the retooling and upgrading of the manufacturing industries and the outward investment trend of mainland enterprises. Furthermore, while the mainland will invest much more in R&D in the next few years and move to upgrade technology to meet the targets of the Plan, it will need to acquire the necessary technologies. Hong Kong’s role as a technology marketplace should thus flourish.
Other Asian markets: Better potential for large economies
The mainland aside, there exists plentiful business opportunities in a number of markets in the region. If anything, the expansion of most Asian economies will moderate in the face of a deteriorating external environment, especially for those with high dependence on exports. Yet sound fundamentals of some economies, not least current account surpluses, large exchange reserves and high domestic savings, should put them in a fairly good position to weather the downturn in developed economies. In the meantime, demand from China, coupled with more leeway for monetary loosening due to lower inflationary pressure in some countries, should also mitigate their economic slowdown.
% share of exports to China by selected Asian economies
Source: CEIC
Of note to Hong Kong exporters, holding particular potential are countries with a huge domestic market like India and Indonesia. In the case of India, economic growth will be bolstered by consumption, given its high savings and a fast-growing middle class. Its smaller reliance on trade is also an edge to counteract the external tumult. Likewise in Indonesia, which will benefit from low trade exposure too, domestic demand is expected to remain robust on the back of expanding-class consumption, plus easing inflation. On the other hand, Vietnam will likely continue to suffer from overheating, and Thailand from the adverse effects of flooding, apart from their vulnerability to the global downturn.
Other emerging markets: Selected outlets for diversification
Despite the ripple effect of the global slowdown, there are still some welcome outlets in other parts of the fledgling world, although growth of most emerging economies will temper, especially for those with high exposure to developed economies. In Latin America, commodity exporters like Argentina, Brazil and Chile should benefit from firm commodity prices. But for Mexico, given its close links with the US, growth will likely be dragged down by the lukewarm US economy. However, the abolition of anti-dumping duties on a wide range of mainland-origin products from December 2011 is expected to enhance the access of Hong Kong exports to the Mexican market.
In contrast, Central and Eastern Europe will remain a weaker region due to its close integration with the EU. Countries with a vulnerable financial position will be particularly hard hit, whereas economies marked by sound fiscal conditions like Poland should fare better. Outside the EU, Turkey, with relatively robust domestic demand, may be a potential market for Hong Kong, although elevated inflation and cooling EU demand will weigh on Turkish growth. Russia, for its part, is expected to gain from firm oil and commodity prices, while its imminent WTO accession should open up further business opportunities. In addition to tariff reductions, Russia should follow international practices in areas like customs administration, which will certainly facilitate sales to the market.
For the Middle East and North Africa (MENA), steadfast crude oil prices should strengthen the economic health of oil exporters, although social and political unrest will remain a major downside risk in the region. Given the lingering security concerns, Hong Kong exporters should take full advantage of Dubai’s entrenched role as a regional business hub. For the rest of Africa, rising inflow of capital and investment, especially from Asian nations, should boost its growth prospects. Firm commodity prices will also help. For instance, in South Africa, Hong Kong’s largest market in Africa, strong gold prices should propel a faster pace economic growth, which supports higher consumer spending and in turn drives demand for imports.
