Jake's View

Slumping retail sales are misleading us about the real state of the economy

Quarterly gross domestic product numbers are more reliable, and they’re showing an uptick

PUBLISHED : Wednesday, 03 August, 2016, 9:15pm
UPDATED : Wednesday, 03 August, 2016, 10:54pm

Hong Kong’s retail sales plunged 10.5 per cent in the first half of this year – the worst drop in 17 years – dragged down by the persistent tourism and economic downturn.

SCMP, August 3

I’m a lazy fellow and nothing allows me to indulge this laziness quite so much as regularly pushing the same old pin into the balloon of doom and gloom about retail sales.

The first chart lays out the essential fact. The retail sales statistics that the government publishes every month account for only about 26 per cent of total consumer spending in Hong Kong. This figure has been in general decline over the years and is again in decline now.

The retail sales figures take no account at all of consumer services, which now account for more than half of total consumer spending, no account of consumer purchases over the internet and no account of several other categories of goods that are sold outside of department stores, supermarkets and other conventional shops.

The only reliable benchmark for consumer activity is the quarterly gross domestic product numbers. These are not yet available for the second quarter but, as of March, they showed consumption expenditure still rising at 2.6 per cent year over year.

The reason for all the gloom, of course, is a slowdown in tourism spending by mainland visitors. This has a much more pronounced effect on the retail sales figures than it does on the more general GDP consumption data.

For instance, purchases of durable goods make up 18 per cent of the total coverage of the retail sales data, about twice as great a proportion as they represent in the consumption data.

Durable goods also account for the bulk of tourism spending in shops. Thus when a slump in tourism spending causes sales of durable goods to fall by 24 per cent in the first half, the effect on the trend in the retail sales data is twice as great as it is on the wider figures.

It is also worth noting that the sales of these durable goods have less impact on the economy than, for instance, a consumer service like a massage.

The durable goods are all imported, which means that little more than shop rental and the wages of the sales staff stay in Hong Kong. The proportion of the total expenditure which stays here is much greater for the massage. The retail sales data, however, scorns the massage.

And, continuing to look on the brighter side of things, the second chart sets out the implied average inflation rate of the retail sales index and compares this with the consumer price index.

It suggests that over the last year conventional shops have been regaining a pricing power that they had been losing over the previous three years.

Yes, I know this is all a bit technical. Can’t help it. That’s the way these things work sometimes, in your trade as much as mine.

But the underlying message is simple enough. The retail sales figures exaggerate the bad news at the moment because they are not sufficiently comprehensive. Don’t bother with this data unless Census and Statistics fixes it.