Silent winners
Bad economic news seems a near-daily event in Hong Kong just now. All indicators seem to point to a worsening rather than improving economy and hope seems in short supply. Steeper than expected retail price declines in April confirmed an unbroken deflationary trend that is sapping confidence among companies and property-owning households.
SAR deflation stems from a lack of demand for goods and services prompting firms to cut prices in order to shift their wares. Such harsh competition hits profit margins, forcing companies to cut costs and trim payrolls. Toss into the brew an erosion of monopolist firms' ability to keep prices high and the result is a smaller economic pie for all concerned.
Well yes and no. Unchecked deflation promises the kind of downward spiral seen in the 1930s depression era and often warned of as the ultimate conclusion to Japan's bust. In this scenario, monetary growth collapses, banks pull back credit, home owners default, firms stop investing and a self-reinforcing cycle of economic destruction takes over.
Such an outcome must be avoided at all costs but there is little reason to think Hong Kong faces such a risk. Banks and big firms are comfortably capitalised and well able to service liabilities. The core trading economy remains strong and there is evidence that unemployment may be close to peaking.
The problem is that a weak property market is crimping consumption while credit growth is anaemic due to banks' obsession with collateral-based lending. There are good reasons to believe this cyclical adjustment may be close to playing itself out. The strength of China's largely Hong Kong-funded export sector alone gives strong cause for optimism. The weakening of the United States dollar is another positive.
But it is also worth reflecting on the broader impact of deflation. Half the population lives in rented accommodation and has seen real purchasing power gains. Many can now afford to buy a place of their own. They are the silent winners.
