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SCMP Reporter

Hong Kong retail sales rose modestly in volume in July - the first time in 22 months - as buyers responded to a further decline in prices.

 But statistics released yesterday gave a mixed picture of the SAR's fragile economic recovery, with the composite consumer price index (CPI) slumping 6.1 per cent year on year last month.

 This is the lowest such fall on record and marked the tenth straight month of deflation.

 July sales volumes rose 1 per cent from a year earlier, surprising economists who attributed it to widespread discounts or promotions offered by retailers to entice shoppers.

 They said consumption was also boosted by a larger population staying back for summer holidays instead of travelling overseas, and the return of overseas Chinese to Hong Kong for a summer break.

 Bank of East Asia chief economist Shamus Mok Chung-yuk said it was 'an encouraging month', during which people were more willing to spend.

 'They took advantage of the cheaper prices and shopped.'  However, chief economist at ABN Amro Enzio von Pfeil warned that the deflationary environment was a 'two-sided coin' for Hong Kong.

 Although falling prices contributed to making Hong Kong more competitive, Hong Kong's recovery from recession remained a profitless one, with the value of retail sales in July down 8 per cent to $15.8 billion over the same month last year.

 'Falling prices mean higher real interest rates, but Hong Kong is continuing to price itself back into the regional market,' said Mr von Pfeil.

 However, on balance, he said, the latest figures pointed to structural changes to the economy that were positive in the long term.

 The Government said a marked decline in private-housing rentals, as previously adjusted market prices continued to filter through, was the main factor in the continued downward trend of prices overall.

 The one-off 50 per cent rate reduction for the period July to September also continued to have an impact.

 For last month, prices fell heaviest in the clothing and footwear sector, which declined 25.6 per cent, while housing, a major CPI component, also fell sharply, slumping 9.5 per cent, and durable goods were down 8.8 per cent.

 Fuel and light was the only index in the composite CPI to rise, climbing 0.3 per cent compared with a year earlier.

  Despite the increase in the sales volumes, Pacific Challenge Securities director of research Alan Hutcheson was cautious about calling a definite rebound in the economy.

 'Whether a rebound is in place or not depends on sets of [retail] figures in August and September,' he said.

 He pointed out that, during the economic downturn, a larger proportion of the population had refrained from travelling overseas, which helped domestic spending significantly.

 For the first seven months, retail sales declined a year-on-year 10 per cent in value and 5 per cent in volume.

 In July, sales of consumer durables such as home appliances and furniture, but other than cars, outperformed any other categories, growing 19 per cent in volume.

 Sales of jewellery, watches and clocks, and valuable gifts climbed 6 per cent and clothing and footwear increased 2 per cent.

 In supermarkets, the centre of a punishing price war, sales had gone up 1 per cent.

 Car sales, the worst casualty since the beginning of this year, saw a less steep decrease in sales, dipping 10 per cent.

 Fuel sales dropped 9 per cent. Mr Mok said retail sales in volume terms were expected to grow further last month given that prices had deteriorated further for the month, with no reverse in the trend for some time yet.

 'You won't hear the word inflation probably until the end of the first half next year,' he said.



Sales gain amid record fall in CPI