Hong Kong Export Outlook for 2019: Cautiously Optimistic Amid Lingering Trade Tensions

The global economy may encounter increasing uncertainties and slower growth in the year to come. While the cyclical recovery in the major industrial economies is expected to continue, the growth momentum is likely to falter amid trade tensions and less accommodative monetary conditions. At the same time, many of the emerging economies are expected to enjoy a near-term improvement, largely on account of the recovery of global demand and improved commodity prices. Higher oil prices, however, could put pressure on those nations with large external payment deficits.

Turning to the HKTDC Export Index, 51% of exporters expect their sales to increase or remain unchanged over the coming year. While the world’s cyclical economic recovery may warrant an optimistic outlook over the short-term, there is also an awareness that rising trade protectionism and geopolitical friction may see the underpinning fundamentals deteriorate, disrupting trade and investment flows and undermining long-term growth.

2018: A Sustained Export Performance

Drilling down into the particulars of the Hong Kong economy, the Sino-US trade dispute is yet to have a significant negative impact on export levels, partly because of strong underlying demand and partly because some exporters opted for earlier shipment in order to preempt the implementation of the tariffs. Overall, in the first 10 months of 2018, Hong Kong’s total exports grew by 9.8% year-on-year, following an 8% increase in 2017 as a whole. In terms of markets, the growth of Hong Kong‘s exports was broadly based with regards to its traditional export destinations, with trade with the US and the EU significantly up, while its exports to Japan were the lowest among all its major markets.

With regards to developing Asia, exports to China and the ASEAN bloc maintained their momentum, partly down to the region’s extensive production network and partly on account of rising demand for consumer goods. Outside developing Asia, a number the other emerging markets recorded more impressive growth, with exports to emerging Europe up 34%, Latin America 16% and Africa 16%.

Product-wise, electronics remained the primary driver of growth, up 14% year-on-year during in first 10 months of 2018 and accounting for about 68% of Hong Kong’s total exports. In the clothing sector, where exporters have been exposed to increased competition from alternate production bases, exports showed a decline of 3.3%. For its part, the timepiece sector recorded only a marginal increase, leaving it to exports of high-end jewellery to show the highest growth for the period in question, although the toy sector also delivered significant growth. For household electrical appliances, however, increased competition saw exports fall by 6%.

Higher unit values for Hong Kong exports also contributed to a growth in sales value. The unit value index increased by 1.8% in 2017 and 2.5% over the first nine months of 2018. Improving overseas demand, along with steadier commodity prices, helped to support export prices.

Global Economy Maintains Momentum

Despite the challenges to the world trade environment, the cyclical recovery of the global economy has maintained its momentum through 2018 and is expected to continue into 2019. According to the IMF, the global economy will grow 3.7% in 2018 and remain steady at the same rate in 2019. Economic growth in the advanced economies, led by the US, is expected to continue, albeit at a slower pace, spurred by tax cuts and rising employment. Growth in the developing economies is expected to remain relatively stable, despite trade conflicts and disruptive investment flows.

Among the developed economies, the US has maintained growth of 3.5% in the third quarter of 2018, and is expected to continue to grow at a slower rate through 2019. US growth will be buoyed by full employment, coupled with ramped up consumer spending and business investment. Federal tax cuts have encouraged US consumers and companies to spend and increase investment domestically. However, there are concerns that the widening budget deficit may push up inflation and quicken the pace of monetary tightening.

In the EU, economic growth is still expected to remain stable in the near-term, supported by the high levels of confidence, relatively low financing costs and improved labour market conditions. In Germany, the resolution of a political stalemate caused by inconclusive elections may mean more support for German-French co-operation on Eurozone reforms. The French economy has been responding positively to a mix of labour law reforms and tax and spending cuts. However, the departure of the UK from the EU, and the increasing possibility of a hard Brexit may cause disruption to both the UK and EU economies in the coming year.

In Japan, the victory of Shinzo Abe in the ruling Liberal Democratic Party (LDP) leadership election suggests that the highly accommodative financial conditions that form part of the government’s “Abenomics” policy will remain in place in the near future. Hosting the 2019 Rugby World Cup and the 2020 Olympic Games is expected to lead to increased investment in construction and a rise in income from tourism. At the same time, Japan’s exports are likely to be boosted by the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which comes into force on 30th December 2018. However, a hike in consumption tax scheduled for October 2019 is expected to cause a decline in private consumption, and that coupled with the effects of a rapidly aging population and shrinking labour force is likely to mean that the Japanese economy will remain on a slow growth path.

Emerging economies are projected to improve in the near-term due to the recovery of global demand and improved crude and commodity prices, which benefit countries relying on exports of manufactured goods and natural resources. However, oil-importing countries will face difficulties because of rising oil prices, and this may dampen growth in those with large external payment deficits.

The economy of mainland China is expected to maintain its current growth level. 2019 will be the fourth year of the implementation of the 13th Five-Year Plan and the mainland is expected to achieve its target of becoming a moderately prosperous society by 2020. As part of the strategy to re-balance the economy, private consumption will remain the main driver for growth. Besides reducing import tariffs on consumer goods to stimulate import, the first China International Import Expo (CIIE) was held in November 2018, demonstrated China’s major initiative to transform from “selling globally” to “buying globally”.

Growth in ASEAN is expected to be sustained, due to robust external demand and the recovery in global fuel prices, backed by a ramping up of infrastructure investment and buoyant private consumption. The implementation of the Hong Kong-ASEAN Free Trade Agreement (HAFTA) in January 2019 may increase demand for certain consumer goods and strengthen Hong Kong’s connections with the region. The Sino-US trade conflict has encouraged the diversion of trade manufacturing facilities towards ASEAN, leading to an increased flow of capital goods and parts and components.

Latin America‘s economy is likely to continue a modest recovery. Brazil’s economy is gradually picking up momentum because of the rise in energy and commodity prices, coupled with optimism that the outcome of the country’s elections will result in renewed political and economic consensus and stability. Meanwhile, Mexico’s economy is recovering ground following the replacement of the 24-year-old North America Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement (USMCA).

The emerging European economies are benefitting from continued growth across Europe and worldwide. Renewed fiscal stimuli, stronger consumer spending and rising business confidence are likely to support growth in the region, although Poland and Hungary could face problems if they lose some EU funding in a reaction against growing domestic populism. In Russia, improved oil export revenue and a looser monetary policy should continue to support economic growth, but the pace of that growth may be slowed by new US sanctions.

Economic prospects in the Middle East are being abetted by improved oil prices and the ongoing economic transformation of the region away from oil dependency towards a strengthening of non-oil sectors. The UAE’s economy will be boosted by its hosting of the Dubai Expo 2020 and the progress of its long term economic policy known as the ‘UAE Strategy for the Future’. Similarly, Saudi Arabia’s Vision 2030, which envisages fundamental economic and social reform and creates more opportunity for business partnerships, could prove to be a positive factor in the outlook for the Saudi economy.

Risks and Challenges

Protectionism is still the biggest threat to Hong Kong’s exports, as shown by the lingering uncertainties caused by the Sino-US trade dispute. In addition, less accommodative monetary conditions in major economies, such as the European Central Bank’s plan to end quantitative easing towards the end of 2018, and sustained geopolitical friction could also create uncertainty over trade and investment flows.

While the dialogue between the US and North Korean governments may help to reduce tensions on the Korean peninsula, the US withdrawal from the Iran nuclear agreement and its reinstatement of economic sanctions are raising tensions in the Middle East, and undermining the region’s growth and development.

In the EU, political developments remain a major concern. Populist parties have formed a new government in Italy, and uncertainty over its economic policies coupled with a lingering budget battle with the EU, is casting a shadow over Italy’s economic prospects. In Germany, Angela Merkel has announced that she is stepping down as leader of Christian Democratic Union (CDU), which has raised tension over who will succeed her and how that will affect the EU’s future direction.

The major obstacle to sustained growth remains the Sino-US trade dispute. Following a post-G20 summit meeting, the two sides agreed to a 90-day trade truce to allow for further talks. However, if there is no deal at the end of this period, the US will increase tariffs on US$200 billion of Chinese imports from 10% to 25%. This dispute risks undermining China’s economic growth, at least in the near-term. Although China has the fiscal and monetary tools to accommodate the negative impact on external demand, a slowdown in Chinese manufacturing activities will further affect global trade and commodity prices. Although the economy seems to be adjusting well to its “new normal”, it will take a strenuous effort to correct the effects of such a major supply-side imbalance.

Hong Kong Exports: Positive Prospects

Given the continuing momentum of global economic growth, and the recent progress in Sino-US trade negotiations, we are cautiously optimistic about the prospects for Hong Kong’s export performance, expecting a 5% growth in exports in 2019. This forecast is supported by our latest HKTDC Export Index survey, in which 51% of the exporters surveyed said they expected their sales to increase or remain unchanged over the coming year. The survey also found that 57% of exporters believed that their unit prices would increase or remain unchanged.

Among the key industries, electronics exporters are the most optimistic. Electronics is the only sector with an improved outlook from the previous quarter. According to an on-site survey at the 2018 Hong Kong Electronics Fair (Autumn Edition), robots and e-sports products are expected to be in strong demand.

The outlook for clothing exports is less promising. Rising operating costs, especially in mainland China, and the continued diversification of production facilities to South and South-east Asian countries, is likely to lead to Hong Kong’s clothing exports being undercut.

Hong Kong’s toy exports were boosted strongly by the release of new video game consoles in 2017 and continued to grow in 2018. Looking ahead, prospects for the market hinge on whether there will be a release of new game console models in the near-term. The markets for e-sports and smartphone games are both on the rise. However, Hong Kong’s export statistics may not fully record Hong Kong’s toys business as it mostly takes the form of offshore trade, with shipments bypassing Hong Kong.

Hong Kong’s exports of watches and clocks enjoyed a slight resurgence in 2018 and are expected to remain stable in 2019. Smartwatches, which are compatible with smartphones and other digital devices, will remain the key growth engine for Hong Kong’s watch exports. The rapid development of electronic payment may further boost the global demand for wearable tech. Growing demand for craftsmanship and design may also boost sales of hybrid watches, which perform some of the basic functions of a smartwatch, but also display a sense of craftsmanship.

Less robust economic growth is likely to affect Hong Kong’s jewellery exports. Growing conservatism among consumers may weaken demand for high-end items, although the rising popularity of accessible items that feature good branding, design, quality and craftsmanship may help support jewellery sales. Demand for gold jewellery is likely to be propped up by the consumer appetite for gold in major markets such as mainland China and India. Other jewellery, including platinum and diamonds, may also remain popular.