Hong Kong's 'slowdown' is not the threat it seems

GDP and inflation figures paint a dire picture of the city's situation, but the real economy is far more robust than the deceptive data suggests

PUBLISHED : Monday, 13 May, 2013, 12:00am
UPDATED : Monday, 13 May, 2013, 3:31am

The front page of Saturday's South China Morning Post made sobering reading. Apparently Hong Kong's economy is slowing, even as inflation is mounting.

The trigger for this alarm call was the release on Friday of economic data for the first quarter of the year.

Viewed in year-on-year terms, growth was flat in the first three months of the year at 2.8 per cent. But in quarter-on-quarter terms - that is comparing the first quarter of this year to the last quarter of last year - Hong Kong's gross domestic product expanded by a feeble 0.2 per cent.

That's a steep slowdown from the 1.4 per cent rate recorded over the last three months of 2012.

Meanwhile, consumer prices were up by 3.6 per cent in March compared with a year earlier, and government economist Helen Chan warned that more inflation is on the way.

On the surface, these numbers appear to paint a grim picture. But dig a little deeper, and things don't look so bad.

First that growth number. The biggest influence on Hong Kong's GDP numbers is the global trade cycle, and thanks largely to Europe's recession, international trade is relatively weak right now.

As a result, Hong Kong's goods exports grew by just 1.8 per cent in the first quarter of the year, down from 4.8 per cent between October and December. With exports equivalent to almost 200 per cent of the city's GDP, that's enough to weigh heavily on headline growth.

Happily, headline growth numbers have very little to do with the actual health of the city's economy.

That's because most of those goods exports weren't really exported by Hong Kong at all. They were re-exports; goods the city imports, largely from the mainland, magically adds 16 per cent to their value, and on to the rest of the world.

What's really going on here is simple transfer pricing to avoid tax. But it means a slowdown or a pick-up in global trade can have a huge impact on Hong Kong's GDP numbers while having almost no visible effect on the ground in the city.

And on the ground, things don't look too bad. Domestic demand is strong, and with unemployment at just 3.4 per cent - comfortably below its 10-year average of 4.8 per cent - it's likely to remain robust.

What's more, the inflation outlook isn't quite as troubling as the government's warning suggests.

Sure, at 3.6 per cent in March, consumer inflation was well above its long-term 2 per cent average.

But that's largely because of housing rents and rates. With a 32 per cent weighting, these are the biggest single item in the consumer price index shopping basket. So March's 5.2 per cent year-on-year increase in housing costs go a long way to explain the city's relatively high inflation rate.

But with the government's efforts to cool the local property market finally appearing to have an effect - home prices are down 4 per cent over the last two months - it is likely rents will soon begin to follow.

Meanwhile, the other major constituent of the CPI basket - food price inflation - has been on a declining trend for the last 18 months (see the first chart).

As a result, there are good reasons to hope that although Hong Kong's headline growth may be weak over the coming quarters, the city's real economy won't feel any real pain, while inflation will remain subdued.

Speaking on Friday, government economist Helen Chan said that the weakness of the Japanese yen would make Japan's exports cheaper, hitting Hong Kong's own export sector.

Er, no. Japan's exports are priced in US dollars. So when the yen falls, the price of Japan's exports don't go down. The profits of Japanese companies go up.

That's why Japan's Nikkei 225 stock index is up 70 per cent over the last six months.