16 Dec 2015
Hong Kong Export Outlook 2016: Continued Challenges amid the Sluggish World Recovery
Overall, 2016 is unlikely to be an overly painful year for Hong Kong exporters. It should, instead, see a more stable - albeit still unspectacular - external trade environment pushing against unabated headwinds. Despite better prospects in the US, the developed economies on the whole are likely to only expand at a slow pace, while the emerging economies will undergo a bumpy recovery, marked by moderation in China in the midst of its restructuring process. As world economic growth is anticipated to be sluggish and patchy, Hong Kong exports are likely to remain pedestrian in the coming year, with overall sales projected to level off at the 2015 level. Rampant deflationary pressure worldwide, volatilities in the global financial landscape, the growth of regional trade agreements (RTAs), as well as lingering geopolitical threats and increased terrorist concerns, are the major risks and challenges facing Hong Kong exporters.
Faltering Sales Performance in 2015
Parallel to the lacklustre world trade environment, Hong Kong exports, in spite of better showings in the early part of the year, stumbled for the most part in 2015. After a 3.2% rise in 2014, exports declined by 1.7% year-on-year in the first ten months of 2015, with cumulative sales starting to shrink in the post-July period. Lukewarm overseas demand aside, this uninspiring performance could, in part, be attributed to the lower unit value of Hong Kong exports, which edged up 0.9% year-on-year in the first three quarters of 2015 against a 2% increase last year. This was due to the downturn in commodity prices, especially crude oil, in the latter half of 2014.
In the traditional markets, Hong Kong exports to the EU and Japan contracted during the period January-October 2015, although sales to the US continued to expand on the back of its solid fundamentals. In the emerging world, while sales increases were recorded for a number of regions, there was still an across-the-board deterioration in Hong Kong’s export performance. In particular, exports to developing Asia were dragged down by weakening demand from China, where structural reform has led to an economic slowdown. Emerging Europe, in the meantime, was the weakest spot, with the region primarily weighed down by plummeting sales to Russia, where the economy has been crippled by anaemic oil and commodity prices, as well as the Western sanctions imposed over the Ukrainian crisis.
In terms of product, buttressed by the continued popularity of mobile devices, electronics remained the growth juggernaut, with sales up by 2.4% year-on-year in the first ten months of 2015, representing more than 63% of Hong Kong’s total exports. Sales of all other major products, however, were impaired by the lacklustre global trade environment. While toys, timepieces and jewellery all suffered falls of varying degrees, clothing and household electrical appliances were the biggest losers, a consequence of intensified competition. More worryingly for the clothing sector, exporters have now been exposed to other fledgling suppliers across Asia, not to mention their counterparts on the mainland.
Pale Prospects for 2016
Despite sustained headwinds, the global economy is expected to show a marginal improvement in 2016, although any growth will likely remain modest and uneven. According to the IMF, global growth is projected to accelerate to 3.6% in 2016, after slowing to an estimated 3.1% in 2015 (down from 3.4% in 2014). In the case of the advanced economies, led by the US, the moderate recovery will be largely on track, stoked by continued low oil and commodity prices. For developing economies, which have slowed further in 2015, growth is expected to pick up somewhat, alongside moderating expansion in China. That said, the external environment will remain challenging. While consumption in the overseas markets should stabilise gradually, caution will remain prevalent. Retailers and importers will, therefore, continue to be prudent in terms of order size, lead-time and pricing. Indicative of the lingering difficulties with foreign buyers, the 4QHKTDC Export Index indicates a further deterioration in the overall confidence of Hong Kong exporters in the near term.
In the developed world, the US will continue to dominate. Underpinned by low unemployment, steady payroll increases, an improving housing market, better household balance sheets and stronger consumer confidence, the US economy will gather further momentum. As such, the Federal Reserve should be on course to normalise its monetary policy at a slow and tempered pace. The stronger dollar, though, may undermine US exports and the earnings of multinational corporations, a development likely to be aggravated by slackening shale production amid sustained low oil prices. Economic factors aside, Sino-US trade relations in the run-up to the US presidential election in November 2016 may further affect Hong Kong’s export performance. With “China-bashing” rhetoric likely to come into play, there will probably be calls for a tougher stance against imports from the mainland, something that will inevitably affect Hong Kong exports manufactured across the border.
Across the Atlantic, the economic prospects of the EU, though enlivened by the Investment for Europe initiative, are very much dependent on the European Central Bank's aggressive bond buying programme. This serves to boost exports and suppress imports by pushing down the euro, while reducing borrowing costs by lowering bond yields. High unemployment, unabated deflationary pressure, austerity and deleveraging, lingering debt problems as well as geopolitical disturbances, however, remain the major downside risks. Even Germany, the economic bright spot over the last few years, is hampered by spillovers from the Ukrainian crisis and recent refugee problems, while France, the second largest Eurozone economy after Germany, is threatened by renewed terrorist attacks. The UK, however, should see a brighter outlook outside the Eurozone, as demand will be buoyed by its robust housing market, steady employment growth and continued wage increases.
Similarly in Japan, aggressive monetary easing is needed to keep the yen weak and enhance the price competitiveness of Japan's exports. Rising corporate profits may bode well for employment and wage prospects. The spectre of deflation and the slow progress of structural reforms, however, will remain causes for concern. Consumer sentiment may also be dampened by the second round of the consumption tax increase, scheduled for April 2017, although domestic demand may strengthen sporadically ahead of the tax hike. Worse still, the expected weakness of the yen will undermine the country’s import of consumer goods, despite the fact that the rise in exports incited by enhanced price competitiveness may bode well for its intake of industrial inputs.
For their part, the emerging economies will struggle with a choppy revival in 2016. The oil-importing emerging economies will benefit from low crude prices, but it will be at the expense of the oil-exporting nations. Meanwhile, an improved appetite for consumption in the US will be countered by soft demand from the EU and Japan. Diverging monetary policies in the developed economies, on the other hand, may lead to more volatile capital flows and exchange rate movements in the emerging markets. Those with solid economic fundamentals and those that can leverage the lax monetary conditions in the Eurozone and Japan should be in a better position to cope with the fluctuations of the capital markets.
Developing Asia will remain the world's most dynamic region. For China, growth will shift into moderate gear in pursuit of a more sustainable and balanced expansion based on domestic demand. While Central Government accepts a lower growth rate, coined as "the new normal", the goal of achieving a moderately prosperous society by 2020 under the 13th Five-Year Plan will require annual economic growth of at least 6.5% over the next five years. As a result, stimulus measures are expected to maintain the economic momentum. A number of initiatives – notably the Free Trade Zones, the Belt and Road as well as various economic and financial reforms, including the move towards a more market-driven RMB exchange rate highlighted by a modest depreciation against the US dollar since August 2015 - should facilitate economic upgrading and a greater integration with the world economy over the medium to long term. This should lead to increased efficiency and productivity, albeit with periodic volatilities and short-term uncertainties.
Elsewhere in Asia, growing regional integration, hand-in-hand with the escalating diversification of sourcing and manufacturing from China, should support growth in ASEAN. While accelerated reforms in Indonesia are needed to prop up its economy, the recent conclusion of the Trans-Pacific Partnership (TPP) will further encourage foreign direct investment into Vietnam. Indeed, Vietnam and Indonesia, alongside Myanmar, where increased political stability and a more favourable investment environment are expected following the general election of November 2015, are now attractive production bases for foreign manufacturers. The Philippines is among the fastest-growing economies in ASEAN, with its robust growth and an improving fiscal outlook leading to upgrades in sovereign investment ratings. Outside ASEAN, India is another bright spot, largely on the strength of its economic stability, on-going reforms and rising investment.
In terms of other emerging markets, opportunities abound in spite of temporary stress and cyclical corrections. In Latin America, the outlook for resource-rich countries is largely tainted by low commodity prices. Yet Brazil should benefit somewhat from hosting the 2016 Summer Olympics, whereas Mexico, thanks to its deep links with the US, stands to piggyback on the continued pick-up of the American economy. In addition, the warming of US-Cuba relations should also stimulate new business opportunities.
In emerging Europe, growth will remain dictated by the fragile recovery of the EU economy. Poland, Hungary and the Czech Republic are poised to cash in on any increase in demand from other EU members. Outside the EU, Turkey, though facing heightened political and trade tensions with Russia after the downing of a Russian fighter jet, is also slated to profit from its close connections with the EU. For its part, Russia will continue to fall under the shadow of the Western sanctions imposed over the Ukrainian crisis, aggravated by shaky oil and commodity prices.
As for the Middle East, subdued oil prices will remain a heavy drag on regional growth. Saudi Arabia and the UAE, however, should be able to withstand the low crude prices thanks to their huge reserve funds. Meanwhile, in light of the recently concluded nuclear agreement and an anticipated sanctions relief, Iran's economy is expected to soar. Given the mounting geopolitical tensions in the Middle East, Dubai, which is striving to expand its role as a leisure and shopping hub, will remain an important business and trading centre for tapping into the region.
Incessant Risks and Uncertainties
Deflation is still a major threat to the medium-term export outlook. Persistent downward price pressure is particularly damaging for developed economies, such as the EU, where stubbornly high unemployment and heavy indebtedness continue to weigh on incomes and place a heavy strain on its emergent economic recovery. Inflation is, indeed, very low around the globe. The steady economic recovery in the US is apparently unable to induce considerable price pressure, as the emerging economies, spearheaded by China, will merely expand at a modest pace. The sustained weakness in oil and commodity prices will only compound the problems still further.
In addition, a strong US dollar may further add to global deflationary pressure. Following China's one-off devaluation against the US dollar in August 2015, in order to step up the liberalisation of the RMB, the currencies of a number of emerging economies, including South Korea, Taiwan, Singapore, Thailand, Malaysia, Indonesia and Vietnam, have depreciated by varying extents. Though unlikely, sustained competitive devaluations could further undercut world trade growth.
To amplify these concerns, the divergent policy directions of the major central banks could impose substantial stress on those emerging economies with large external financing gaps. Amid the discrepancy between the Federal Reserve's gradual monetary tightening and the lax monetary policies in the Eurozone and Japan, the world's capital market is likely to remain volatile. Conceivably, normalisation of the US monetary stance could prompt further capital outflows from the emerging economies, causing liquidity to tighten, their currencies to depreciate and deterioration in macroeconomic stability.
China's transition to a lower growth rate may have broader repercussions for the global economy, especially for those countries that depend on exporting to the mainland, such as Japan, Korea and the commodity producers. Given the on-going structural reforms, the overall impact of slowing Chinese demand is unlikely to be substantial or long lasting. Efforts to strengthen domestic demand will likely whet an appetite for consumer goods, while industry upgrading is expected to prop up the sales of investment goods.
In another development, the proliferation of RTAs may yet add to the uncertainties faced by Hong Kong exporters, who may risk being discriminated against as non-signatories. A notable case in point is the just concluded TPP, an agreement that covers 36% of world GDP and 25% of global trade. As an outsider to the deal, and therefore excluded from preferential duty treatment, the mainland, the major production and sourcing base for Hong Kong, will risk facing a deterioration in its export competitiveness in the TPP markets, not least in the US.
Last but not least, the worsening of the geopolitical environment in some regions could also impair trade prospects. In the Middle East, political unrest and military conflicts will likely continue in several countries, especially with respect to the Islamic State, with the recent downing of a Russian warplane by Turkey further threatening regional security and economic interests. Making matters worse, terrorism is re-emerging as a major risk to the world at large and to Europe in particular, a development exemplified by the destruction of a Russian passenger jet over Egypt and terrorist attacks in Paris. Closer to home, territorial disputes in the East China and South China Seas, tensions in the Korean Peninsula and socio-political developments in Indochina - albeit showing signs of calm of late - invariably bring elements of uncertainty to regional stability and trade flows.
Listless Prospects for Hong Kong Exports
While the global trade environment is expected to become slightly more stable, the pace of world economic growth is set to be slow and uneven. Sustained consumer frugality in the overseas markets, coupled with nagging risks and challenges, should remain a drag on Hong Kong’s trade performance. Moreover, the continued softness of oil and commodity prices, exacerbated by the prevailing weakness of the RMB against the dollar, should exert further downward pressure on the unit value of Hong Kong exports. Barring any jolts arising from a rekindled global downturn, adverse geopolitical developments or escalated security concerns, the forecast is for Hong Kong exports to show zero growth in value in 2016, but a 2% rise in volume.
Industry-wise, Hong Kong’s electronics exports are expected to see steady growth. According to an onsite survey at the Autumn Electronics Fair, 83% of buyers and 86% of exhibitors anticipate that their sales will remain unchanged or increase in 2016. Mobile devices and related accessories continue to hold the best promise, reflecting the sustained demand for smartphones and tablets. Smart home appliances, in association with related systems/solutions and Internet-of-Things (IoT) applications, also possess high sales potential. Over the medium term, sales of a wide array of products will receive a boost from the landmark deal to expand the WTO’s Information Technology Agreement (ITA). Under the terms of the expanded ITA, tariffs on more than 200 additional products, amounting to US$1.3 trillion and 7% of global trade, will be eliminated over an agreed transition period, probably starting as early as mid-2016. GPS devices, video game consoles, video cameras, loudspeakers, touchscreens and IT testing instruments are among the additional designated products.
On the other hand, household electrical appliances will have to contend with challenges from indigenous mainland exports, although lighting products should fare much better. According to an onsite survey at the Autumn Lighting Fair, 86% of buyers and 90% of exhibitors anticipate that their sales will remain unchanged or increase in 2016. 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.
In the case of clothing, the situation is far worse. The continued trend towards a decentralised model for manufacturing and sourcing, as a result of the ever-rising production costs on the mainland, will continue to deter overseas orders. In this regard, the rise of a number of emerging production bases in the Asian region - especially Vietnam in view of its TPP membership - will pose increased challenges to Hong Kong clothing exports. On the demand side, while clothing consumption should strengthen slightly in tandem with the shaky revival of the global economy, the focus is likely to stay on items that offer comfort, function and value-for-money. In all likelihood, products with basic and practical features are expected to record better performance, although shoppers are gradually resuming spending on more fashionable items.
To some extent, as the stabilising economic conditions in the overseas markets will stimulate an appetite for toys, sales of traditional playthings are expected to be steady in 2016. As well as licensed products from popular children’s TV shows, cartoons and movies, the key trends will be stronger demand for educational toys and youth-focussed electronics. On the production side, with Hong Kong manufacturers considered more capable of meeting the stringent overseas regulatory requirements on toy safety, the relocation of production and sourcing from southern China to other production bases is less likely. Hong Kong’s export statistics, however, cannot fully record Hong Kong’s toy business, which is mostly offshore trade, with many shipments bypassing Hong Kong.
In the case of timepieces, Hong Kong exporters are cautiously optimistic about the overall sales outlook for 2016. High-tech offerings will certainly intrigue many of the overseas buyers. Spurred by the growing popularity of health consciousness and wearable technology, there are decent sales prospects for performance watches and smart devices. There is, however, still space for classic timepieces. In particular, the demand for less expensive items, such as fashion watches, should hold up well amid the general adherence to frugality. With the prevalence of electronic gadgets, however, manufacturers should turn their watches into fashion accessories for mix and match usage, rather than for simply for telling the time.
With regard to jewellery, consumer appetite will again be impaired by the shift away from lavish consumption. Most shoppers, thanks to their caution, will likely stick to less pricey articles marked out by good quality and craftsmanship, rather than flashy brands. While likely to secure more orders, Hong Kong exporters will have to struggle with the fluctuating costs of precious stones and metals, especially in the case of bullion, given the diverse monetary policies of the major central banks worldwide. These vagaries in raw material prices will be a major element of uncertainty, and could expose the jewellery sector to particular risks and challenges.