Making the Most of a Modest Recovery
18 December 2013
Sales to the Chinese mainland assumed a leading role in buttressing growth (photo: EyePress)
The global economic environment is expected to become increasingly accommodating in 2014, with growth gradually accelerating in both the developed and emerging economies. Unlike recent years, the major developed economies should expand simultaneously and at a more sustainable pace, which is welcome news for Hong Kong exporters. While consumption in the markets should increase slightly, value-for-money will continue to be the most important factor for most shoppers. Importers and retailers will therefore remain relatively conservative. Not surprisingly, buyers in these areas are still expected to play safe in terms of order size, lead time and pricing, while further diversifying their sourcing and manufacturing from the mainland to other lower-cost production bases throughout Asia.
Among the traditional markets, the United States looks the strongest and most resilient. Despite concerns over the possible withdrawal of massive monetary easing, the US economy will remain on track for recovery, against a backdrop of stronger employment, an improving housing market and gains in asset prices. However, unresolved fiscal problems and political gridlock will damage the near-term growth outlook and hamper any increase in domestic demand. While consumer caution still prevails, there is growing evidence that consumers are more willing to spend on higher-value products. In response, importers and retailers will continue to look for well-priced quality products, with many of these based outside China, including in the US.
EU to Recovery
Businesses can expect an improved global trading environment next year, thanks to a synchronised upturn in major economies, says HKTDC Principal Economist Daniel Poon
In light of the recent stabilisation of the debt crisis, the European Union is also showing tentative signs of recovery, given its ultra-loose monetary policies, widespread fiscal consolidation, and structural reforms in several countries. Germany, where exports will increasingly benefit from rising demand outside the EU, remains the bright spot, although gains are now spreading to France and even to the more debt-ridden nations, notably Italy. Outside the Eurozone, the outlook for the United Kingdom has been buoyed by its revitalised housing market. High unemployment, austerity and de-leveraging, however, will constrain any revival in consumer confidence, with consumption only expected to expand at a slow pace and the purchase of good-value products remaining the norm.
Japan’s new stimulus policies, known as Abenomics, should set the country on course for a firmer recovery, despite its continued tensions with China. Aggressive monetary easing should keep the yen weak, boosting Japan’s exports amid a rise in external demand. Its improving corporate and investment outlook and buoyant asset prices are expected to help Japan’s labour market and domestic consumer sentiment. Tokyo’s success in securing the 2020 Olympic Games will also provide Japan with additional impetus, allowing it to implement further reforms and pro-growth measures. A weak yen, though – and one likely worsened by a planned increase of the consumption tax in April – will put pressure on the country’s imports of consumer goods, even if stronger exports bode well for its intake of industrial inputs.
Emerging Economies to Rise
The new year should see major developed economies expand simultaneously and at a more sustainable pace (photo: EyePress)
The emerging economies will also largely perform better in 2014. For China, with its new government pledging to let the markets play a more decisive role in allocating resources, the administration will focus more on reforming those institutional arrangements that will be conducive to efficiency and productivity gains. Major efforts will be made to deepen industrialisation, urbanisation, modernisation of the rural and agricultural sectors, wider adoption of IT, as well as to ensure balanced development across its regions. Private consumption will also be nurtured to achieve a more balanced growth between domestic and external demand, as well as between overall consumption and investment-led growth, creating enormous business opportunities for most Hong Kong exporters.
Elsewhere in developing Asia, growth is likely to be overshadowed by the impending tapering of quantitative easing in the US, with the anticipated exodus of capital likely to unsettle the financial landscape across the region. Developing Asia, however, is now on a much stronger footing than during the 1997-1998 Asian financial crisis. Years of structural reform and macroeconomic policy management have strengthened many developing Asian economies, particularly the active build-up in foreign exchange reserves.
Firm demand from China will also provide a vital stabilising force across the wider region. With trade between ASEAN and China facilitated by the China-ASEAN Free Trade Area, stronger demand from the traditional markets will provide an additional stimulus to growth. As part of diversification efforts, Hong Kong exporters should cultivate the fledgling consumer goods markets of other Asian countries, including Indonesia, where there is impressive growth potential, despite short-term stress due to a global reassessment of emerging- market risks.
India Offers Potential
Hong Kong exports should grow by 5.5 per cent in value and 3.5 per cent in volume in 2014
The rise of low-cost production bases in several Asian countries, notably Myanmar and Cambodia, may also have considerable long-term significance. Outside of ASEAN, India – albeit somewhat of a difficult market – may also prove a welcome outlet for Hong Kong exporters. Although its recent balance-of-payments difficulties may temporarily dampen growth, the longer-term prospects of the Indian economy should improve, along with its accelerated reform programme and the added stimulus of considerable election spending in 2014.
Opportunities abound in other emerging markets despite temporary stresses and cyclical corrections. In Latin America, resource-rich countries should benefit from the convalescent global economy and, notably, from the sustained momentum in China that helps keep most commodity prices at profitable levels. Brazil is also expected to benefit from its hosting of the 2014 World Cup and 2016 Summer Olympics, whereas Mexico, with its close links to the US, should profit from the gradual pick-up across the border.
For the emerging European economies, the bottoming out of the EU will provide an impetus to regional growth. Those economies with healthier fiscal conditions, such as Turkey, are likely to remain in the fast lane. Russia should also receive an added boost from sturdy oil and commodity prices.
For the Middle East and North Africa, steady crude prices should strengthen the economic health of oil exporters, although ongoing political unrest in the region will likely affect its economic activity. Given that the countries affected by the unrest do not represent major markets for Hong Kong, the direct impact on the city’s exports to the region should be relatively small. A fast-recovering United Arab Emirates, on the other hand, will encourage further growth in re-export trade and clearly benefit Hong Kong’s exports to the region. For the rest of Africa, growth prospects are likely to be facilitated by rising inflows of capital and investment, as well as firm oil and commodity prices. Kenya and Nigeria, for instance, are particularly interesting markets for Hong Kong exporters to bear in mind.
Improved Export Outlook
The more favourable external environment should benefit Hong Kong exports during the course of 2014. The upward price pressure on Hong Kong exports will also help. While consumer frugality will largely persist in many overseas markets, discretionary spending is also poised to expand. Strengthening demand, coupled with unrelenting increases in production costs, will exert stronger upward pressure on the unit values of Hong Kong exports. Barring any renewed global downturn, escalating protectionism or adverse geopolitical developments, Hong Kong exports should grow by 5.5 per cent in value and 3.5 per cent in volume in 2014, compared with estimated rises of 3.5 per cent and 2.5 per cent, respectively, for 2013.
Industry-wise, Hong Kong’s electronics exports can expect to see steady growth. Sustained overseas demand will bolster overall sales of IT and telecoms products. Smartphones and, to some extent, tablets are evolving from novel gadgetry to essentials for many consumers. In the meantime, AV products, such as large-screen TVs and digital cameras, will continue to face keen market competition. Suppliers of household electrical appliances will also have to contend with challenges from mainland manufacturers, but lighting products should fare better. By and large, a modest appetite for both finished electronics and electrical appliances will spur demand for semi-manufactures, which may involve multiple shipments across the border.
Garment exports will improve slightly in line with the global market recovery. Increasingly, more ostentatious and extravagant outfits will see greater demand. Most consumers, however, will continue to opt for simplicity and value-for-money, with basic and practical products the most sought after. On the production front, the accelerating trend towards diversified manufacturing and sourcing models, as a result of rising production costs on the mainland, will continue to deter overseas clothing orders. Rising competition from several emerging production bases, including Bangladesh, Indonesia, Vietnam, Cambodia and Myanmar, will also bring a range of new challenges to the market.
Basic Toys Popular
In the toys sector, the enthusiasm for back-to-basics items is unlikely to die down noticeably, despite the increasing demand for high-tech items. This should see the sales of traditional items continue to expand, albeit at a more moderate pace. Sales of electronic and video games, for their part, should see a continued rebound, partly driven by the release of a number of upgraded consoles. On the supply side, with Hong Kong manufacturers deemed more capable of meeting stringent overseas toy safety regulations, the relocation of production and sourcing from southern China to other production bases is unlikely. As such, competitors from Asia pose less of a threat to Hong Kong toy suppliers than to other industries traditionally strong in the city, notably the clothing sector.
Timepieces will especially benefit from any upturn in the global market, with sales of higher-end items inevitably growing as disposable incomes rise. Sales of less expensive items, particularly fashion watches, should hold up well with an adherence to cost-conscious spending abiding. In the overall lower-end segment, however, despite demand expected to remain sturdy, the prospects for Hong Kong exports will be hindered by increased levels of competition from many indigenous mainland suppliers.
As with timepieces, the consumer appetite for jewellery will become stronger as the global economy grows more robust. While undoubtedly securing more orders, Hong Kong exporters will have to contend with the unpredictable costs of precious stones and metals, with upward pressures coming from increased demand, while any changes in US financial policy could have a more negative impact. These problems will be compounded by increased competition.
Looking beyond 2014, the World Trade Organization agreement reached at the Bali Ministerial Conference earlier this month – should it be borne out in subsequent trade rounds – could have far-reaching implications for many global markets, particularly those most inhibited by the ever-present spectre of increased protectionism. The next 12 months, however, should make it clear if there is really to be a new dawn for global trade.
For more on international market trends please see the December issue of the HKTDC Trade Quarterly
- Garments, Textiles & Accessories
- Toys & Games
- Watches & Clocks
- Mainland China
- Hong Kong
- North America