Bleak outlook: economists fear deflation as Hong Kong consumers prices grow at slowest pace since 2010

After Consumer Price Index rose just 3pc last year, down from 4.4pc in 2014, experts say rise in interest rates, falling property prices and continued slowdown in spending by tourists could hit city hard this year

PUBLISHED : Thursday, 21 January, 2016, 10:21pm
UPDATED : Thursday, 21 January, 2016, 10:46pm

Hong Kong consumer prices last year grew at their slowest pace since 2010, while economists fear a further deterioration in property prices and employment in the coming year could drag the city into deflationary territory.

According to data released by Census and Statistics Department, the Consumer Price Index (CPI) rose 3 cent last year – down from a 4.4 per cent rise in 2014.

The situation worsened in the past few months, with index growth in November and December easing to 2.4 per cent and 2.5 per cent respectively, mainly dragged down by falls in the prices of durable goods, clothing and footwear.

“The downward pressure [on the economy] is mounting … Hong Kong could face deflation as early as this year in the worst scenario,” said Kevin Lai, chief economist at Daiwa Capital Markets Hong Kong.

He explained that recent capital outflows would soon drive up interest rates, which could hurt consumption with people needing to pay more to cover their bank loans. When demand contracts, consumer prices move down, leading to deflation.

Paul Tang Sai-on, chief economist at the Bank of East Asia, was slightly less pessimistic, forecasting this year’s CPI growth could still stay positive at 1.6 per cent.

Tang said the apparent weakness in durable goods and clothing was mainly due to fewer tourists spending less. This could spread to the labour market this year, further reducing consumption.

Among a set of disappointing economic figures last year, spending on consumer goods by locals was a relative bright spot, maintaining growth rates of 6.1 per cent in the second quarter and 4.3 per cent in the third. This was helped by a low but stable unemployment rate, which stayed at 3.3 per cent in 2015, unchanged from 2014.

However, that situation is likely to change soon, according to Tang.

“When businesses go down, a crash in rents is inevitable” Tang said, adding that the gloomy income prospects and contraction in asset prices would both hurt local consumption.

He expected the unemployment rate to rise to 3.7 per cent in 2016.

“This is going to be a particularly difficult year for Hong Kong with multiple negative economic factors just coming together,” said Nathan Chow, vice-president and economist at DBS Bank.

He said the current difficult prevailing factors included a strong Hong Kong dollar amid a currency war among Asian countries; the slowdown in China’s economy and the downturn of the city’s tourism and retail industries after a booming decade.