15 June 2016
2016 Mid-Year Export Assessment: Signs of Stabilisation Following a Rocky Start
Reflecting a shaky external economic environment at the beginning of 2016, Hong Kong exports fell by 5.6% year-on-year in the first four months of the year. Global trade, however, is expected to stabilise somewhat in the medium term. There are indications that the United States is regaining economic traction, that China has found a studier footing, and that firmer oil prices are providing some breathing space for commodity-exporting countries – all pointing to a gradual strengthening of overall foreign demand. However, Hong Kong exports are now projected to fall by 4% in 2016, as opposed to the zero growth previously forecast. Sustained deflationary pressure in developed countries, renewed faltering of emerging markets, the disruptive slowdown of the Chinese economy, and heightened geopolitical tensions pose the major downside risks to exports.
Further Deterioration in Early 2016
In line with a rocky global economy at the start of 2016, Hong Kong’s export performance has been well below expectations. Triggered by fears over a disruptive slowdown of the Chinese economy in the early part of the year, and aggravated by waning US growth and sustained deflationary pressures in the European Union and Japan, both business and consumer confidence fell in most parts of the world as equity prices plunged, exchange rates became volatile and crude-oil prices declined sharply. While growth of the major economies was subdued, many of the resource-rich countries were further beset by plummeting commodity prices. Given weaker global demand, Hong Kong exports from January to April 2016 dropped by 5.6% year-on-year, on top of a 1.8% decline for the whole of 2015.
Other than a few emerging markets, the decline in Hong Kong exports this year has been across the board. In the developed world, exports were down by 6.2% to the US, by 0.8% to the EU and by 5.6% to Japan. In the emerging world, exports to developing Asia fell by 6.7%, weighed down by the Chinese mainland where sales declined by 7.6%. Dwindling regional trade in light of slackening global demand also suppressed sales to ASEAN. On the other hand, thanks to rebounds in Russia and the UAE despite lower oil and commodity prices, exports to emerging Europe and the Middle East registered impressive increases, although exports to Latin America and Africa were poor.
Lower unit values of Hong Kong exports, which fell by 2.6% in the first quarter of 2016 compared to a 0.1% rise for the whole of 2015, also contributed to the poor sales performance. Flagging oil and commodity prices coupled with tepid overseas demand exerted immense downward pressure on export prices, more than offsetting the continued upward pressure inflicted by escalating labour costs on the mainland. The prevailing weakness of the renminbi against other major currencies also took its toll. In 2015, the renminbi depreciated by 4.4% against the US dollar and by 4.1% against the yen, although it appreciated by 6.5% against the euro. In the first four months of this year, the renminbi appreciated by 0.3% against the greenback, but depreciated by 4.8% against the euro and by more than 10% against the yen.
However, Hong Kong exports still performed better than those of many neighbouring economies, including the Chinese mainland (whose exports dropped in US$ terms by 2.6% in 2015 and 7.7% in the first four months of 2016), South Korea (-8.0% in 2015 and -11.5% in the first five months of 2016), Singapore (-14.5% in 2015 and -12.9% in the first four months of 2016) and Taiwan (-10.9% in 2015 and -10.7% in the first four months of 2016).
External Environment Showing Early Signs of Stabilisation
After 2016’s bumpy beginning, the world economy has shown tentative signs of stabilisation and is poised to improve throughout the rest of 2016 and 2017. While US growth is picking up steadily, the Chinese economy has found a firmer footing. Sturdier crude-oil prices amid a gradual rebalancing of global demand and supply has also provided some let-up for commodity-supplying countries. According to the International Monetary Fund, global growth is forecast to increase slightly from 3.1% last year to 3.2% in 2016 and 3.5% in 2017, with the pace of expansion in both developed and emerging countries remaining modest. Against this backdrop, Hong Kong exports should recover somewhat from the downturn in the early part of the year. As shown by the 2Q16 HKTDC Export Index, there is little change in the overall confidence of Hong Kong exporters, notwithstanding the poor showing in the first four months of the year.
In the developed world, the US will continue to lead the pack as the slowdown in the early months of 2016 appears to be temporary. Consumer spending will remain a main driver, aided by low unemployment, steady payroll gains, an improving housing market, better household balance sheets and stronger consumer confidence. Low oil prices are providing another stimulus to consumption, while an expected convalescence should lend support to the beleaguered energy sector. Given a strengthening US economy, the Federal Reserve should be on course to normalise its monetary policy at a slow and tempered pace. To a certain extent, however, the attendant stronger dollar will hurt US exports and the earnings of multinational corporations. In addition to economic factors, the US presidential election in November this year and a consequent change of the administration could further affect Hong Kong exports to the US.
Likewise, the EU’s economic recovery, albeit slower than that of the US, will be led by domestic demand on the back of low crude-oil prices, better labour-market conditions, moderate wage increases, bold quantitative-easing measures and a rebound in investment. An expected weakening of the euro following its recent appreciation, coupled with a steady improvement of the global trade environment, will also boost EU exports, particularly benefiting externally oriented states such as Germany. That said, stubbornly high unemployment, lingering debt problems and rising deflationary pressure, let alone geopolitical tensions, the spectre of terrorism and the ongoing migration crisis, will continue to undermine sentiment and growth. To complicate matters, the United Kingdom’s June 23 referendum on EU membership is another cause for concern. An exit vote is likely to hurt the EU at large by disrupting its well-established economic and trade relations with the UK.
In Japan, economic growth will remain subdued, with the impact of Abenomics and quantitative-easing measures apparently waning. Negative interest rates also seem to be ineffective in driving down the yen. Despite a more stable external environment, a stronger yen should therefore weigh on Japanese exports, and the gloomy sales outlook is expected to be a drag on business investment. In this context, dimmer employment and wage prospects, worsened by intensifying deflationary pressure, should more than offset the benefit of low oil prices to consumer spending. That said, consumer sentiment could be given a temporary lift, as the second round of sales-tax increases – already having been delayed until April 2017 – is now set to be postponed until October 2019.
While sales to traditional markets will remain crucial because of their sheer size, Hong Kong exporters are advised to continue to diversify into the emerging world to capitalise on the renewed opportunities in selected markets. A number of emerging markets are still in dire straits, but the bottoming out of crude-oil prices is likely to benefit commodity-exporting emerging economies, although the impact should be limited as the oil rebound is unlikely to be substantial in the medium term. An improved appetite for consumption in developed nations, principally the US, will give another fillip to growth. On the other hand, sustained diverging monetary policies of the major economies could lead to further volatile capital flows and exchange-rate movements in emerging markets. Those with stronger economic fundamentals and those that can leverage on the lax monetary conditions in the EU and Japan, however, are better placed to cope with the vagaries of capital markets.
Once again, developing Asia will remain the world’s most dynamic region. For China, growth will shift into a lower gear in pursuit of a more sustainable and balanced expansion based on consumption, while it strives to achieve a moderately prosperous society under the 13th Five-Year Plan, which requires annual growth of at least 6.5% until 2020. Although the authorities are unlikely to roll out large-scale measures to drive growth, supply-side reforms are expected to gradually free up market vitality. A number of initiatives, notably the Free Trade Zones, the Belt and Road Initiative, the Internet Plus, and the Made by China 2025, should also facilitate economic upgrading and increased integration with the world economy. These are expected to bring about higher efficiency and productivity, albeit with periodic volatilities and short-term uncertainties. As such, efforts to prop up consumption should whet the appetite for consumer goods, whereas industry upgrading should bolster the demand for capital goods.
By contrast, growth of the ASEAN economy is expected to quicken, underpinned by greater regional integration, growing inward foreign direct investment and robust domestic demand. The great diversity of ASEAN countries offers market opportunities as well as alternative production bases for Hong Kong companies. In particular, Vietnam, reinforced by its membership of the Trans-Pacific Partnership (TPP), Indonesia and Myanmar have become attractive manufacturing locations for foreign firms as the production environment in China becomes ever-more challenging. Outside ASEAN, India is another bright spot, further illuminated by its strong economic momentum on the back of rising domestic demand. The country’s favourable demographics are also beneficial to Hong Kong manufacturers facing labour shortage in China, with India becoming a new choice for the relocation of labour-intensive industries from the mainland.
In Latin America, the downturn of the regional economy should ease gradually in view of an expected stabilisation of oil and commodity markets. Yet any further rebound of oil and commodity prices is unlikely to be substantial, and the pace of economic recovery tends to vary markedly from country to country. For instance, while Brazil’s outlook is tainted by economic mismanagement and political challenges, growth in Mexico will remain sound in parallel with the resurgent US economy. In the meantime, the warming of US-Cuba relations should also stimulate new business opportunities.
Likewise in emerging Europe, the nascent EU recovery will provide an impetus for regional growth, with Poland, Hungary, the Czech Republic and Turkey all likely to benefit. The Russian economy, for its part, should receive some support from firmer oil and commodity prices.
As for the Middle East, more stable crude-oil prices should bode well for the prospects of oil exporting countries. Saudi Arabia, for example, which is striving hard for economic diversification, should see faster growth for the remainder of this year and in 2017. Meanwhile, in light of the lifting of economic and financial sanctions, Iran’s economy is expected to soar, providing new opportunities for Hong Kong businesses. Yet geopolitical tensions and security threats remain major downside risks to doing business in the region. As such, as well as selling directly to markets in the region, Hong Kong exporters could take full advantage of Dubai’s entrenched role as a regional trading hub, which attracts buyers from as far afield as Africa.
All in all, in the wake of the poor start to 2016, the global economy is set to take a turn for the better for the rest of the year. In the developed world, there are signs that the US economy is regaining momentum, while the EU, although in a slower lane, is also expected to show an incipient revival. In the emerging world, ongoing structural reforms should gradually stimulate growth in China, whereas firmer oil and commodity prices should allow some breathing space for the resource-rich countries. Stronger demand from traditional markets, alongside divergent opportunities in emerging ones, should underpin the global trade environment. In light of the disappointing figures to date, however, Hong Kong exports are now expected to shrink by 4% in 2016, down from the zero-growth forecast made in December 2015. Looking ahead into 2017, Hong Kong exports should be in a better shape amid a continued improvement of the external environment, although there is no shortage of risks and challenges in the short to medium term.
Potential Risks to the Medium-Term Outlook
Sustained deflationary pressures in developed economies
Deflation is still a major threat to the medium-term exports outlook. In particular, as prevailing inflation is well below target in many developed economies, there remains the risk of diving into persistent deflation. Incessant downward price pressure is especially damaging for the EU, where exorbitant joblessness, heavy indebtedness and geopolitical developments continue to weigh on its budding economic recovery, as well as Japan, where a stronger yen, fiscal consolidation and the unfavourable labour market cast a long shadow on economic prospects. Given the weak fundamentals of both the EU and Japan, any major shock in these economies is likely to reverberate across the globe, with detrimental effects on the world economy and the overall trade environment.
Renewed faltering of developing economies
While deflationary pressures are intense in both the EU and Japan, the steady economic recovery in the US is expected to induce inflation. The long odds on sustained divergent policy directions taken by major central banks could put a renewed strain on those emerging economies with large external requirements. Given the discrepancy between the Federal Reserve’s gradual monetary tightening and the ultra-loose monetary policies in the EU and Japan, the world’s capital markets are likely to be volatile. Conceivably, the continued normalisation of the US’ monetary stance could prompt further capital outflows from emerging economies, causing liquidity to tighten, their currencies to depreciate and, ultimately, a deterioration of macroeconomic stability.
Disruptive slowdown of the Chinese economy
The slowdown and rebalancing in China are not only a big challenge for the country itself, but also a major concern for the global economy. In all likelihood, the transition will continue to affect world trade and commodity prices. Although the slowing rate of growth of the Chinese economy seems to have stabilised somewhat, the recent steadiness has been supported by strong government-led credit expansion at the expense of restructuring goals such as shaving capacity, reducing inventory and cutting leverage. The tasks associated with the correction of major imbalances therefore remain strenuous, and the risks of a further slowdown are real. If the Chinese economy decelerates more than anticipated, it will further drag down global trade and commodity prices, especially hurting those countries that depend on exporting to the mainland, such as Japan, South Korea and the commodity producers.
Heightened geopolitical tensions
Separately, a deterioration of the geopolitical environment in certain regions could also spoil trade prospects. A notable case in point is the Middle East and North Africa, where the geopolitical tensions are expected to stay elevated for the foreseeable future. Political unrest and military conflicts in connection with the Islamic State, in particular, will continue to have serious implications for the EU in the form of terrorism and a refugee influx. In addition, the EU’s relations with Russia remain tense over the unresolved crisis in Ukraine, again threatening regional stability and the recovery outlook of the bloc. In Asia, territorial disputes in the East China and South China seas, in tandem with the strains on the Korean peninsula, invariably bring unabated threats to regional stability and trade flows.