Feel HK's pain with the Monitor Misery Index

PUBLISHED : Monday, 17 November, 2008, 12:00am
UPDATED : Monday, 17 November, 2008, 12:00am

It's official: gross domestic product figures for the third quarter confirm that Hong Kong is in recession.

The trouble is that the GDP numbers released on Friday only tell us about the change in Hong Kong's overall economic output.

What they don't necessarily tell us is how much pain ordinary people in the city are feeling, or how much worse conditions are likely to get.

To try and answer that question, we need to look elsewhere.

The tool economists typically use to gauge how badly ordinary folk are hurting is called the misery index. This simply adds the rate of consumer inflation to the unemployment rate; the higher the misery index reading, the more economic pain people are suffering.

The problem is that although this provides a useful yardstick for developed economies, it doesn't work very well for Hong Kong.

As the first of the two charts below shows, the standard misery index for Hong Kong remained stubbornly high through the years immediately preceding the 1997 handover, indicating a high degree of economic pain during what were in reality boom times for the Hong Kong economy.

Then, as the Asian crisis hit the city, the misery index fell off a cliff, indicating better economic conditions for ordinary people.

Hong Kong obviously needs a tailor-made misery index better suited to local conditions.

Unemployment and inflation should still be included. They are good proxies for the pain felt by consumers, who drive roughly 25 per cent of business in the city.

But there are three other pillars of the Hong Kong economy that also need to be considered: the financial and business services industry, our trade-related businesses and the property sector.

The second chart below shows a preliminary attempt to compile a misery index specifically designed for Hong Kong; let's call it the Monitor Misery Index, or MMI.

Unemployment and inflation are in there, plus three other indicators.

The financial services industry is represented by the percentage change in the Hang Seng Index over the last 12 months, adjusted so it carries a roughly equal weight to the other components.

Other figures could have been used, but the Hang Seng Index is a reasonable proxy for the state of the financial sector and has a powerful effect on sentiment in other sectors: the bigger the fall in the index, the poorer people feel.

Import-export activity and related services are represented by the change over the last 12 months in the government's quantum index of re-exports: fewer containers passing through Hong Kong means harder times for the trade sector.

Finally, the year-on-year change in the Centa-City index of residential property prices stands in for the impact the real estate sector has on ordinary people's lives.

The MMI is an imperfect measure, but, as the chart shows, it clearly gives a better picture of economic hardship in Hong Kong than the standard index.

The MMI was relatively high during the inflationary years of the early 1990s, fell in the run-up to the handover, only to soar again in the Asian financial crisis. It then sank as the crisis receded, jumping again following the technology bubble burst and September 11, 2001.

The 2003 Sars scare shows up as a relatively small spike, reflecting the brief nature of the outbreak. Then after Sars we enjoyed a few years of relative prosperity, which came to an abrupt end earlier this year as the index suddenly shot higher.

Still, at a reading of 6.8 for September, the MMI remains fairly low by past standards. But it is sure to jump when last month's numbers are in, probably topping 12.

Even that level is modest, however, compared with the high of 25 the MMI reached in the depths of the Asian financial crisis.

Hopefully, things won't get that bad again, but with rising unemployment, slowing trade and falling property prices, a level of 20 is easily possible next year.

Unfortunately, there's a lot more misery to come.