14 Dec 2016
Hong Kong’s Export Outlook for 2017: A Partial Promise
It is not a year for undue pessimism, but 2017 is likely to feature an unassuming – albeit marginally improving – global trade environment accompanied by unabated challenges. While the US economy looks set to gain traction in 2017, the EU and Japan will remain in a slower lane. Growth prospects for emerging economies will also be mixed. As the economies reliant on natural resources are likely to bottom out in sync with steadier oil and commodity prices, China will see slower growth in the midst of its restructuring process, although developing Asia should stay as the world’s outperformer. Therefore, Hong Kong exports are not expected to fare much better in 2017 than in 2016, with value sales expected to show zero growth. Downside risks to this forecast include rising trade tension triggered by US president-elect Donald Trump’s promised protectionist policies, possible deflationary shocks in the EU and Japan, untamed volatility of capital markets, a marked slowdown of the Chinese economy, and escalated geopolitical tensions.
Deteriorated Sales Performance in 2016
In tandem with the faltering growth of the global economy in early 2016, Hong Kong’s export performance has fallen below earlier expectations. Following a 1.8% decline in 2015, exports dropped by a further 2.5% in the first 10 months of 2016 year-on-year, despite the stabilisation of late. Sluggish overseas demand aside, this poor showing could partly be accounted for by the lower unit value of Hong Kong exports – which contracted by 2.1% year-on-year in the first three quarters of 2016 against a 0.1% rise for the whole of last year – given persistently low oil prices.
Except for a few emerging markets, a downturn in sales has been ubiquitous. In traditional markets, Hong Kong exports to the US, the EU and Japan were down by varying degrees during January-October 2016. In the developing world, there was also a widespread deterioration in sales performance. In particular, exports to developing Asia were dragged down by anaemic demand from China, whereas slackening world demand further suppressed regional trade and hence Hong Kong exports to ASEAN. On a brighter note, thanks to rebounds in Russia and the UAE amid steadier oil prices, exports to emerging Europe and the Middle East showed encouraging increases, although sales to Latin America and Africa dwindled.
Product-wise, electronics remained the best performer bolstered by the continued popularity of mobile devices, with sales edging up slightly in the first 10 months of 2016 to constitute an overwhelming 65% of Hong Kong’s total exports. Sales of all other major export items, however, were hurt by the lacklustre world trade environment. While timepieces, jewellery, clothing and household electrical appliances all suffered varying sales declines, toys were the biggest loser, a consequence of mounting competition from devices such as smartphones and tablets that also have game functions. Yet Hong Kong’s export statistics may not fully record Hong Kong’s toys business as it mostly takes the form of offshore trade, featured by shipments bypassing Hong Kong.
A Slightly Better Global Environment in 2017
Continued challenges notwithstanding, the world economy is expected to see some improvement in 2017, but any growth is likely to remain sluggish and patchy. According to the IMF, global growth is projected to quicken to 3.4% in 2017, after moderating to an estimated 3.1% in 2016. For advanced economies, spearheaded by the US, the slow recovery will be largely on track, spurred in part by still low oil prices. For developing economies, which have picked up marginally in 2016, growth is expected to accelerate despite taming expansion in China.
That said, the external environment will remain formidable. While consumption in overseas markets should stabilise gradually, consumer frugality should prevail with retailers and importers remaining cautious with respect to order size, lead time and pricing. Suggestive of the difficulties with foreign buyers, the 4QHKTDC Export Index shows deterioration in the overall confidence of Hong Kong exporters in the near term, although they maintain a neutral outlook towards 2017 as a whole.
In the developed world, the US is expected to outperform with consumption as the main growth driver, aided by low joblessness, steady payroll gains, an improving housing market, better household balance sheets and firmer consumer confidence. Relatively low oil prices are likely to provide another fillip to consumption. While a stronger US economy should put the Federal Reserve on course to normalise its monetary policy, its pace may be affected by the election of Donald Trump as the next US president, particularly in view of his proposed massive fiscal stimulus that could reignite inflation. To some extent, the attendant stronger dollar will hurt US exports and the earnings of multinational firms. Uncertainties in US trade policy and Sino-US relations under the new administration might also dampen US growth prospects.
Likewise in the EU, economic recovery, albeit slower than that of the US, will be supported by domestic demand on the back of still low crude-oil prices, better labour-market conditions, moderate wage increases, bold quantitative-easing measures and a rebound in investment. On the other hand, stubbornly high unemployment, lingering debt problems and unabated deflationary pressure – coupled with geopolitical tensions, the spectre of terrorism, the ongoing immigration crisis, and uncertainties related to Brexit and a slew of upcoming elections elsewhere in the EU – will continue to undermine sentiment and the growth outlook. In particular, Brexit is likely to hurt the EU 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 somewhat ineffective in driving down the yen to boost exports despite the recent weakness of the Japanese currency against the greenback. As a result, gloomy investment, job and wage prospects – worsened by sustained deflationary pressure – look likely to offset the benefit of modest oil prices to consumption. The postponement of the second round of sales-tax increases from April 2017 to October 2019 may give consumption and imports a temporary lift, however.
The emerging economies, for their part, will continue to put up with an erratic resurgence in 2017 on the back of stabilising oil and commodity prices. While the moves to cut crude production should benefit oil exporters, the impact could be limited amid substantial supply-demand imbalance over the medium term. Meanwhile, major economies’ sustained diverging monetary policies might lead to further volatile capital flows and exchange-rate movements in emerging markets. Yet those with stronger economic fundamentals and those that can leverage on the loosened monetary conditions in the EU and Japan would be better positioned to cope with the ebb and flow of capital markets.
Developing Asia will stay as the world’s most dynamic region. In China, growth will shift into lower gear as the country pursues a more sustainable and balanced expansion based on consumption, while striving 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 should gradually free up market vitality. A number of initiatives, notably the Belt and Road Initiative, Internet Plus and Made in China 2025, should also facilitate economic upgrading and increased global integration. This should bring about higher efficiency and productivity, albeit with periodic volatilities and short-term uncertainties. As such, efforts to boost consumption are likely to whet an appetite for consumer goods, whereas industry upgrading is expected to stimulate demand for capital goods.
Elsewhere in the region, growth of the ASEAN economy is expected to remain relatively robust, underpinned by greater regional integration, growing inward foreign direct investment (FDI) and strong domestic demand. The great diversity of ASEAN countries offers market opportunities as well as alternative production bases for Hong Kong companies. In particular, Vietnam, even with the likely demise of the Trans-Pacific Partnership (TPP) as reaffirmed by the US president-elect, Indonesia and Myanmar are attractive manufacturing locations. Outside ASEAN, India is another bright spot, buoyed by its strong economic momentum on the back of rising domestic demand. The country’s favourable demographics are also beneficial to Hong Kong manufacturers, with India becoming a new option for labour-intensive industries.
In terms of other emerging markets, opportunities abound in spite of temporary stress and cyclical corrections. In Latin America, the downturn of the regional economy should ease gradually in view of the stabilising oil and commodity market. Yet any further rebound of oil and commodity prices is not likely to be substantial, and the pace of economic recovery tends to vary from country to country. For instance, Brazil’s outlook is tainted by economic mismanagement and political challenges, but growth in Mexico could benefit from the resurgent US economy, although Trump’s protectionist stance is a cause for concern. In the meantime, the warming of US-Cuba relations, if sustained, should also stimulate new business opportunities.
Likewise in emerging Europe, the timid EU recovery will provide some impetus for regional growth. Most notably, Poland, Hungary and the Czech Republic are expected to capitalise on the moderate EU growth. Turkey also holds longer-term promise for Hong Kong businesses despite a fragile business environment amid the prevailing political disturbances. The Russian economy, for its part, should receive some support from firmer oil and commodity prices.
As for the Middle East, more stable crude prices should bode well for the prospects of oil-exporting nations. Saudi Arabia should see faster growth ahead. Meanwhile, the lifting of international economic and financial sanctions, if undisrupted, could lead to the acceleration of Iran’s economy, opening up new opportunities for Hong Kong businesses. But geopolitical tensions and security threats will continue to be major downside risks to doing business in the region. Hong Kong exporters, apart from selling direct to the concerned markets, should therefore take full advantage of Dubai’s entrenched role as a regional trading hub.
Persistent Risks and Challenges
A renewed global downturn is the major threat to the medium-term export outlook. Despite firming crude prices and rising inflation expectations in the US, downward price pressure is likely to remain intense in the EU, where high joblessness, heavy indebtedness, uncertainties arising from Brexit and other unfavourable regional developments that include the looming elections in France and Germany continue to weigh on its fragile economic recovery. Likewise in Japan, a relatively strong 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, aggravated by uncertainties created by the US president-elect, any shocks there are likely to reverberate across the globe, with detrimental effects on the world economy and the overall trade environment.
Meanwhile, the long odds on sustained divergent policy directions taken by major central banks could renew the strain on emerging economies with large external funding requirements. Any unexpected tightening of the US monetary stance, which has become an elevated risk following Trump’s election victory, could prompt huge capital outflows from emerging economies, causing liquidity to tighten, their currencies to depreciate and a deterioration in macroeconomic stability.
Protectionism may yet prove to be a further hindrance to Hong Kong’s export outlook. Particularly in the US, if Trump sticks to the protectionist agenda proclaimed in his election campaign, the global trade environment would be significantly undermined. The likely withdrawal from the TPP, the pledge to break or renegotiate the North American Free Trade Agreement (NAFTA), the intention to label China as a currency manipulator and bring trade cases against it – as well as the threat to use every lawful presidential power to remedy trade disputes with China – would be detrimental not only to Sino-US trade relations but would also have serious repercussions for a number of countries such as Mexico.
While protectionism is rearing its ugly head again, the economic transition in China will continue to affect world trade and commodity prices. Although the slowdown of the Chinese economy seems to have stabilised, the recent steadiness remains dependent on credit expansion and could risk undermining long-term reform efforts. If the Chinese economy decelerates more than anticipated, it would further weigh on global trade and commodity prices, especially hurting those countries that depend on exporting to China.
As a final factor to bear in mind, adverse geopolitical developments could also spoil trade prospects. Notable cases in point are the Middle East and North Africa, where geopolitical tensions are expected to remain high 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 an influx of refugees. In Asia, territorial disputes in the East China and South China seas, and tension on the Korean peninsula, pose threats to regional stability and trade flows.
Vaguely Improving Prospects for Hong Kong Exports
As the pace of the world economic recovery is likely to remain hesitant in the year ahead, the global trade environment should be in a state of convalescence with no major turnaround. Sustained consumer cautiousness in overseas markets, hand-in-hand with nagging risks and challenges, should continue to be a drag on Hong Kong exports. In addition, the prevailing weakness of the renminbi against the US dollar should exert further downward pressure on the unit value of Hong Kong exports, despite firmer raw-material prices. Barring any jolts in the EU and Japan, uncontrollable vicissitudes of the capital markets resulting from divergent policy directions among major central banks, rising protectionism, a disruptive slowdown of the Chinese economy or heightened geopolitical concerns, our forecast is for Hong Kong exports to level off at the 2016 level in the coming year.
Industry-wise, Hong Kong’s electronics exports are expected to see steady growth. According to an onsite survey at the Autumn Electronics Fair, 45% and 53% of the surveyed buyers and exhibitors, respectively, anticipated that their sales would increase in 2017. Those projecting a sales decrease accounted for only 17% and 10% of the buyers and exhibitors, respectively. Although sales of mobile devices might have levelled off, industry players are now expecting AR (augmented reality) and VR (virtual reality) applications to fuel the future of the electronics market. Meanwhile, the market remains optimistic about the potential of wearable electronics, notably for health and sports related wearables, as well as smart home products, including smart lighting. In a market awash with LED lighting products amid falling prices, the industry is increasingly turning to smart lighting and other system items in the search for growth.
For clothing, the situation is less encouraging as the trend of supply chain revamps in China and the ongoing relocation outside of the country will continue to reshape global clothing trade and logistics. Preferential access granted by mature markets also helps to persuade clothing manufacturers to relocate their production of lower-end and mass products to Asian countries, while the quest among Western buyers to shift some of their overseas sourcing back to near-shore locations for better inventory and delivery management will continue to deserve close attention. On the demand side, world clothing consumption should strengthen slightly in line with the bumpy revival of the global economy. Yet most consumers are expected to stick to down-to-earth items that offer comfort, function and value-for-money, although some shoppers are gradually resuming spending on more fashionable items.
To a certain extent, toy sales should steadily pick up on the back of improving economic conditions. In addition to licensed products from popular children’s TV shows, cartoons and movies, there should be stronger demand for educational toys and youth-focused electronics, not least STEAM toys that reinforce science, technology, engineering, arts and maths learning. AR and VR applications are also increasingly popular, although the video-game market will be disrupted by these new technologies, let alone the competition from smartphones and tablets. On the production side, with Hong Kong manufacturers considered to be more capable of meeting the stringent overseas safety requirements, the shift in sourcing from southern China to other production bases is less likely. Hong Kong’s export statistics, however, cannot fully record its toy business, which is mostly offshore trade, with the bulk of shipments bypassing the city.
In the case of timepieces, Hong Kong exporters are cautiously optimistic about the overall sales outlook for 2017, as a more stable external environment is likely to lend some support to overseas demand. High-tech offerings are bound to captivate many overseas consumers. Sparked by the continued popularity of health consciousness and wearable technology, smartwatches will be one of the most popular items in the marketplace. But there is still space for classic timepieces. Specifically, the demand for less expensive items, such as fashion watches, should hold up well amid the general adherence to thriftiness. Apart from going smart, manufacturers should therefore align their collections with the contemporary fashion trends and turn their watches into fashion accessories for mix and match.
In line with other sectors, the budding global recovery should be a positive development for jewellery exports, although the demand for high-end items will still be capped by unabated consumer conservatism. For more accessible items that feature good design, quality and craftsmanship, overseas demand will be increasingly robust as consumers’ purchasing power recovers. While they are likely to secure more orders, Hong Kong exporters will have to struggle with the fluctuating costs of precious stones and metals, especially with regard to bullion, against the background of diverse monetary policies of the world’s major central banks. These vagaries in raw-material prices will be a major uncertainty factor that could expose the jewellery sector to particular risks and challenges.