No relief in sight

PUBLISHED : Wednesday, 07 August, 2002, 12:00am
UPDATED : Wednesday, 07 August, 2002, 12:00am

Another month, another set of awful economic indicators. A city that was once a byword for conspicuous consumption looks to have lost its shopping habit amidst biting deflation and mounting job losses. The latest retail sales figures confirm a hardening trend of reduced consumption that bodes ill for the SAR's economic growth prospects.

Toss into the mix international market turmoil and diminished global growth prospects and the picture looks bleak. A sharp sell-off in SAR exporting stocks over recent days reflects fears that external demand, especially, in the United States, is set to weaken. This matters because strong China-originated exports have been the SAR's one bright economic spot.

Such is the agenda dominating commentary that it is easy to miss the broader picture. A 6.9 per cent volume decline in retail sales in the year to June is a bad number. Yet it follows a period of relative strength. Measured as a three-month moving average, the last four months saw spending increases. It is possible that a few rogue months' statistics distorted a weak, yet relatively stable consumption pattern. Certainly, shoppers' couch-potato habits during the World Cup and concomitant weak tourist arrivals accounted for some of the decline.

More significant is the fact that sales of services, representing more than half of all spending, are not included in the most closely watched barometer of consumer health. Absurdly, for a modern services-dominated economy, everything from children's piano lessons to insurance premiums escape the index compiler's net. The data is available. Yet, it reflects poorly on the government's presentational prowess as well as commentators' tendency to grab at headline numbers that a more accurate economic picture is not on offer.

The point is that the SAR, like much of the rest of the world, is locked into a deflationary trend. Hong Kong has suffered four years of price declines, but economies such as Taiwan and Singapore display similar traits. In an era of falling prices there is no easy remedy as rational consumers sensibly defer spending if they believe they can buy for less in the future.

So long as the pegged exchange rate system is maintained, it is hard to see a clear break in the trend. A weaker US dollar is feeding through to higher prices in select sectors and will surely widen in scope should the greenback fall further.

Sustainable spending increases require confidence to return to the property market. This week saw further price cuts of new flats. A shrinking inventory of unsold units suggests such fears of another price war are overblown yet we are likely to bounce painfully along the bottom for a while yet.