Update on the Hong Kong Economy for The Task Force on Economic Challenges Government Economist

1

Update on the Hong Kong Economy for Update on the Hong Kong Economy for The Task Force on Economic ChallengesThe Task Force on Economic Challenges

Government EconomistGovernment Economist

22 January 200922 January 2009

2

Global developments since last meeting (1)

• Concern over financial market meltdown receded, but global downturn deepening, taking its toll on world trade

• Pressure now spread to wide range of businesses, due to downward spiral from credit crunch; asset market plunge and deteriorating sentiment from job losses

• Asia also hard hit; exports of many Asian economies showed double-digit declines in Nov

• Inflation receding fast, amid weak demand conditions

3

Global developments since last meeting (2)

• Central banks pursuing aggressive monetary easing; benchmark interest rates approaching zero in some advanced economies

• Governments continue to roll out more stimulus packages; US’s huge package still in the pipeline

• Financial institutions in the US and UK continued to report huge losses over the past weeks; UK government just announced its second rescue plan

4

Local developments since last meeting

• Exports suffered across-the-board decline in Nov

• Retail sales and restaurant business show signs of relative improvement during latter half of Dec

• Housing market stabilised somewhat after drastic decline

• Interbank rates down to level before global crisis; credit conditions for some sectors eased somewhat, but credit situations in hard-hit sectors like I/E trade remain severe

• Unemployment rate risen further; job vacancies sharply lower

• 14 measures from Central Government on 19 December 2008 to support Hong Kong economy

5

Global economic situation worsened more than expected…

6

...leading to a successive mark-down in forecasts

Jan 2008 Aug 2008 Jan 2009World 2.8 2.6 -0.2

United States 2.7 1.4 -1.8

Euro area 2.0 1.1 -1.4 Germany 1.9 1.1 -2.0

United Kingdom 2.0 0.9 -2.2

Japan 2.0 1.2 -1.7

China 9.8 9.2 7.4India 8.4 7.7 5.6Hong Kong 5.3 4.7 -1.3Singapore 6.0 5.0 -2.4South Korea 5.0 4.4 0.6Taiwan 4.7 4.7 -1.1Malaysia 5.9 5.2 1.4Thailand 4.9 4.9 1.1

Average of private sector forecasts for 2009

7

US mired in recession…

8

Job losses posing a severe drag on US consumption

-12

-8

-4

0

4

8

12

16

1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08-3

-2

-1

0

1

2

3

4

Retail Sales(LHS)

Employment(RHS)

Year-on-year growth rate (%) Year-on-year growth rate (%)

Dec08-2.0-9.8

9

Plunge in business sentiment; investment stalls

-40

-30

-20

-10

0

10

20

30

40

3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/0820

30

40

50

60

70

80

Gross PrivateInvestment (LHS)

Year-on-year growth rate (%)

Business Confidence(RHS)

Index

10

US imports falling even faster, which impact severely on Asia’s exports

-20

-15

-10

-5

0

5

10

15

20

25

30

1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08

US's importdemand

Year-on-year growth rate in real terms (%)

US's importsfrom Asia

Nov08-8.8

-10.9

11

US inventories have depleted significantly; but it will take some time for inventory rebuilding

to resume

-9

-6

-3

0

3

6

9

12

15

18

Q170

Q172

Q174

Q176

Q178

Q180

Q182

Q184

Q186

Q188

Q190

Q192

Q194

Q196

Q198

Q100

Q102

Q104

Q106

Q108

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Change in Inventoryas % of GDP

(RHS)

Real GDPq-t-q annualised

% growth(LHS)

2008Q3:CIV as % of GDP: -0.25%

Real GDP q-t-q growth: -0.5%

(%)

5 Qtrs

2 Qtrs

3 Qtrs

(%)

4 Qtrs

3 Qtrs

12

Situation in EU and Japan likewise worrying …

13

EU’s business sentiment lowest in 15 years; imports cut back sharply amid recession mode

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

35

01 02 03 04 05 06 07 08-6

-4

-2

0

2

4

6

EU's import demandin real terms (LHS)

EU's GDPannualised q-t-q rate of

change in real terms(RHS)

Year-on-yeargrowth rate (%)

Quarter-to-quarter growth rate (%)

Oct08-8.0%

Q308-0.7%

-40

-30

-20

-10

0

10

20

1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08

Dec08-39.9%

EU'sSentiment

Index


14

Similar situation in Japan

-50

-40

-30

-20

-10

0

10

20

30

40

50

95 96 97 98 99 00 01 02 03 04 05 06 07 08-5

-4

-3

-2

-1

0

1

2

3

4

5

Q308 Real GDPGrowth: -0.5%

Index

Q408 Tankan:-16

Japan Import Demand

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18

20

1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08


Nov08:0.5%

Japan GDP vs Tankan Survey

Japan GDP RealGrowth (RHS)

Japan TANKANLarge enterpriese (LHS)

%

15

Exports in Asia all plunging in NovemberGDP growth slowing

-2

0

2

4

6

8

10

12

14

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Q207

Q307

Q407

Q108

Q208

Q308

China Japan Hong Kong Singapore

Korea Taiwan Indonesia Malaysia

Philippines Thailand


Exports all down

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

01/04 01/05 01/06 01/07 01/08

China Japan Hong Kong Singapore

Korea Taiwan Indonesia Malaysia

Philippines Thailand


16

China’s external trade affected in a significant way...

17

Export orders are markedly down CFLP China Manufacturing PMI

( New export orders shifted forward by 1 months)

25

30

35

40

45

50

55

60

65

70

75

01/05 07/05 01/06 07/06 01/07 07/07 01/08 07/08 01/09-50

-40

-30

-20

-10

0

10

20

30

40

50

China Manufacturing PMI - New export orders (LHS)

China's exports (RHS)

PMI (Index) Year-on-year rate of change (%)

18

Industrial value-added growth at record low*

• Excluding January and February, in which the year-on-year comparisons are distorted by the different timing of

the Lunar New Year each year.

0

2

4

6

8

10

12

14

16

18

20

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

0

2

4

6

8

10

12

14

Value added of industry (LHS)

Real GDP (RHS)

Year-on-year rate of change (%)

11/08

Year-on-year rate of change (%)

19

Guangdong’s processing exports and imports both plunging

China's Exports

-20

-10

0

10

20

30

40

50

01/06 07/06 01/07 07/07 01/08 07/08

Mainland's exports

Guangdong's exports

Guangdong's processingtrade exports

China's Imports

-40

-30

-20

-10

0

10

20

30

40

50

01/06 07/06 01/07 07/07 01/08 07/08

Mainland's imports

Guangdong's imports

Guangdong's processingtrade imports

12/2008Guangdong's processing

trade import : -29.7%

Year on Year growth (%)

12/2008Guangdong's processing

trade export : -15.5%

Year on Year growth (%)

20

Mainland’s retail sales still firm

5

7

9

11

13

15

17

19

01/05 04/05 07/05 10/05 01/06 04/06 07/06 10/06 01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08

Real growth (%)

90

91

92

93

94

95

96

97

98

99

100Index (Dec 97 =100)

Retail Sales excluding fuel (above designated size enterprise, LHS)

Retail sales: Total (LHS)

Consumer confidence (RHS)

21

Impact of global financial turmoil on Hong Kong

22

Financial services

23

Financial sector activities sharply down in 2008 Q3

Non-bank financingcompanies

(LHS)

Banking(RHS)

Insurance(RHS)

-60

-40

-20

0

20

40

60

80

100

120

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

-30

-20

-10

0

10

20

30

40

50

60

Business receipts(year-on-year growth rate (%))

Business receipts(year-on-year growth rate (%))

24

…as stock market turnover dwindled

5000

10000

15000

20000

25000

30000

35000

0107

0307

0507

0707

0907

1107

0108

0308

0508

0708

0908

1108

0109

6000

7000

8000

9000

10000

11000

12000

13000

14000

15000

Hang Seng Index(LHS)

0

50

100

150

200

250

0107

0307

0507

0707

0907

1107

0108

0308

0508

0708

0908

1108

0109

Dow Jone'sIndustrial Average Index

(RHS)

Index Index

21.1.09HSI 12584

20.1.09DJ 7949

21/147.7

Daily total turnover (HK$ Bn)

25

…and loan growth down further

Loans for use in HK(excluding trade

finance)

-30

-20

-10

0

10

20

30

40

1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08


Trade finance1998AFC

2001global

downturn

Currentglobalcrisis

Nov0811.5%

1.7%

26

Financial services sector: unemployment/vacancy*

* Private sector vacancies posted by the Labour Department. Latest unemployment rates are provisional.

0

1

2

3

4

5

6

7

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

TotalHigher-skilledLower-skilled

Unemployment rate (%)

-100

-50

0

50

100

150

200

250

1/02 1/03 1/04 1/05 1/06 1/07 1/08

Year-on-year rate of change in vacancies (%)

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

118%

1.6%

1.4%

0.8%

27

Financial services sector: SME weekly survey on business receipt

% decline as compared to normal situation for the week ending:-

SMEs by sectors 28 Nov 5 Dec 12 Dec 19 Dec26 Dec

and 2 Jan 9 Jan

Wholesale trade -24.7 -16.0 -16.4 -16.4 -10.8 -7.6

Retail trade -24.8 -23.8 -24.2 -22.9 -23.2 -22.4

Import/export trades -17.8 -19.4 -18.3 -16.9 -18.9 -19.3

Restaurants -13.9 -14.7 -13.9 -13.1 -12.1 -13.1

Logistics -29.7 -39.0 -34.7 -36.9 -33.5 -38.5

Travel agents -15.2 -11.4 -12.2 -12.1 -12.6 -11.9

Financing institutions

-23.3 -24.1 -24.5 -23.2 -20.7 -18.9

Insurance agents and brokers

-9.2 -9.6 -9.4 -9.7 -9.9 -9.5

Real estate and construction

-32.5 -28.9 -31.7 -31.4 -30.6 -30.4

Business services -8.9 -7.6 -8.0 -11.4 -10.9 -10.3

All the above sectors -18.5 -19.3 -18.4 -17.3 -18.5 -18.5

28

Trading and logistics

29

-15

-10

-5

0

5

10

15

20

25

Q197

Q397

Q198

Q398

Q199

Q399

Q100

Q300

Q101

Q301

Q102

Q302

Q103

Q303

Q104

Q304

Q105

Q305

Q106

Q306

Q107

Q307

Q108

Q308

0

1

2

3

4

5

6

7

8

Hong Kong'stotal exports

(LHS)

World GDP*(RHS)

Year-on-year growthrate in real terms (%)

Year-on-year growthrate in real terms (%)

* The world GDP being plotted here is weighted by Hong Kong's total exports of goods.

Nov08-7.1%

Exports down 7% in November...

1998 AFC

2001 global

downturn

2003 SARS

Current global crisis

30

...drastic decline in cargo flows impacting severely on logistic sector

-80

-60

-40

-20

0

20

40

60

80

1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

Year-on-year growthrate in tonne (%)

Year-on-year growthrate in TEU (%)

Air cargo(LHS)

Container throughput(RHS)

Dec08-28.2%

-24.1%

31

Trading and logistics: unemployment/vacancy*


0

1

2

3

4

5

6

7

8

9

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108



-60

-40

-20

0

20

40

60

80

100

1/02 1/03 1/04 1/05 1/06 1/07 1/08


11/08

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

-23%

4.9%

3.6%

2.1%

32

Trading and logistics: SME weekly survey on business receipt


SMEs by sectors 28 Nov 5 Dec 12 Dec 19 Dec26 Dec and

2 Jan 9 Jan

Wholesale trade -24.7 -16.0 -16.4 -16.4 -10.8 -7.6

Retail trade -24.8 -23.8 -24.2 -22.9 -23.2 -22.4


Restaurants -13.9 -14.7 -13.9 -13.1 -12.1 -13.1

Logistics -29.7 -39.0 -34.7 -36.9 -33.5 -38.5

Travel agents -15.2 -11.4 -12.2 -12.1 -12.6 -11.9


-23.3 -24.1 -24.5 -23.2 -20.7 -18.9


-9.2 -9.6 -9.4 -9.7 -9.9 -9.5


-32.5 -28.9 -31.7 -31.4 -30.6 -30.4



33

Tourism and consumption-related sector

34

Retail sales still down in Nov; tourist arrivals showed some relative

improvement in Dec

* The December 2008 figure is a crude estimate.

-5

0

5

10

15

20

25

1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08


-10

-5

0

5

10

15

20

25

30

1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08

Retail sales

Year-on-year growth rate in volume (%)

Inbound tourists*

Nov08 -2.8%

35

Tourism and consumption-related sector: unemployment/vacancy*


0

2

4

6

8

10

12

14

16

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108



-80

-40

0

40

80

120

160

200

1/02 1/03 1/04 1/05 1/06 1/07 1/08


11/08

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

11%

6.3%

5.8%

2.7%

36

Tourism and consumption-related sector: SME weekly survey on business receipt



2 Jan 9 Jan

Wholesale trade -24.7 -16.0 -16.4 -16.4 -10.8 -7.6

Retail trade -24.8 -23.8 -24.2 -22.9 -23.2 -22.4


Restaurants -13.9 -14.7 -13.9 -13.1 -12.1 -13.1

Logistics -29.7 -39.0 -34.7 -36.9 -33.5 -38.5

Travel agents -15.2 -11.4 -12.2 -12.1 -12.6 -11.9

Financing institutions -23.3 -24.1 -24.5 -23.2 -20.7 -18.9


-9.2 -9.6 -9.4 -9.7 -9.9 -9.5


-32.5 -28.9 -31.7 -31.4 -30.6 -30.4



37

Real estate and construction sector

38

Property market took a breather in December after drastic decline for 2 months

40

60

80

100

120

140

160

180

200

1/03 1/04 1/05 1/06 1/07 1/08

Residential Price Index (Overall)

Residential Price Index (Large)

Residential Price Index (Small)

Indexx

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

1/03 1/04 1/05 1/06 1/07 1/08

Residential propertytransactions

Number

Dec

135.6

102.8101.6

4706

Dec

39

-40

-30

-20

-10

0

10

20

30

40

50

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108

Q109

Building & construction expenditure (Private)

Building consents (8-quarter moving average)(2-quarters lag)

Year-on-year growth rate in real terms (%)

-10.0%

Q308-5.0%

New private construction projects have stalled…

…but Government’s increased construction to provide some offset

Building and construction expenditure

2008 Q1 – Q3

Year-on-year % change% share of

total

Private -0.1% 78%

Public 1.9% 22%

Total 0.4%

40

Real estate and construction sector: unemployment/vacancy*


0

5

10

15

20

25

Q197

Q198

Q199

Q100

Q101

Q102

Q103

Q104

Q105

Q106

Q107

Q108



-60

-40

-20

0

20

40

60

80

100

120

1/02 1/03 1/04 1/05 1/06 1/07 1/08


11/08

1998AFC

2001global

downturn

2003SARS

Currentglobalcrisis

-24%

6.1%

5.1%

2.4%

41

Real estate and construction sector: SME weekly survey on business receipt



2 Jan 9 Jan

Wholesale trade -24.7 -16.0 -16.4 -16.4 -10.8 -7.6

Retail trade -24.8 -23.8 -24.2 -22.9 -23.2 -22.4


Restaurants -13.9 -14.7 -13.9 -13.1 -12.1 -13.1

Logistics -29.7 -39.0 -34.7 -36.9 -33.5 -38.5

Travel agents -15.2 -11.4 -12.2 -12.1 -12.6 -11.9



-9.2 -9.6 -9.4 -9.7 -9.9 -9.5


-32.5 -28.9 -31.7 -31.4 -30.6 -30.4



42

Total job losses by sector since Jun-Aug 2008

Difference in employment at Oct-Dec 2008 as compared to Jun-Aug 2008

-12 100

Trading (1) -7 400

Logistics (2) -4 700

-11 400

Financing -10 600

Insurance - 800

8 100

Retail trade 6 400

Restaurants 1 900

Hotels - 100

9 600

Real estate 5 600

Construction 4 000

Notes: (1) The trading sector includes import/export trades and wholesale trade. (2) The logistics sector includes freight transport, storage, postal and courier services. (3) The figures being listed here are provisional.

Source: General Household Survey, Census and Statistics Department.

Financial services

Trading and logistics

Tourism and consumption-relatedservices


43

Feedback from SMEs

44

Impact on business receipts% decline as compared to normal situation for the week ending:-

SMEs by sectors 28 Nov 5 Dec 12 Dec 19 Dec26 Dec

and 2 Jan 9 Jan

Wholesale trade -24.7 -16.0 -16.4 -16.4 -10.8 -7.6

Retail trade -24.8 -23.8 -24.2 -22.9 -23.2 -22.4


Restaurants -13.9 -14.7 -13.9 -13.1 -12.1 -13.1

Logistics -29.7 -39.0 -34.7 -36.9 -33.5 -38.5

Travel agents -15.2 -11.4 -12.2 -12.1 -12.6 -11.9


-23.3 -24.1 -24.5 -23.2 -20.7 -18.9


-9.2 -9.6 -9.4 -9.7 -9.9 -9.5


-32.5 -28.9 -31.7 -31.4 -30.6 -30.4



45

Impact on employment% change as compared to normal situation for the week ending:-


2 Jan 9 Jan

Wholesale trade 0 0 0 0 0 0

Retail trade -0.6 -0.4 -0.8 -0.4 -0.6 -0.9


Restaurants -2.8 -3.1 -3.3 -2.8 -3.4 -2.9

Logistics -5.8 -6.0 -6.7 -6.7 -4.1 -4.1

Travel agents +0.5 +0.6 0 0 -0.4 0



0 0 0 0 0 0


-7.3 -6.2 -7.6 -8 -8.1 -8.4



46

Impact on access to creditTighter than normal for the week ending:-


2 Jan 9 Jan

(% of SMEs)

Wholesale trade 12.0 9.1 9.1 9.5 10.0 5.0

Retail trade 10.0 8.5 10.1 8.5 8.8 8.0

Import/export trades 17.1 17.1 15.8 17.0 17.0 15.6

Restaurants 19.0 15.3 13.6 14.3 10.7 10.5

Logistics 0 15.0 5.6 11.1 11.8 11.8

Travel agents 3.3 3.6 3.6 3.7 3.8 3.7

Financing institutions 12.5 12.5 12.5 13.2 10.8 10.8


15.0 11.1 10.5 5.0 10.0 10.5


11.4 11.4 8.6 9.1 5.9 2.9

Business services 5.7 5.7 5.7 6.1 6.1 0

All the above sectors 12.5 12.5 11.6 12.1 11.9 10

47

2009 outlook

48

Further mark-down by private sector analysts on Hong Kong’s GDP in 2009

S&P: 0.7-1.2% Credit Suisse: -2.2%

Bank of China: 0.5% Hang Seng Bank: -3%

Citigroup: 0.3% Goldman: -3%

Standard Chartered:

-0.9% Morgan Stanley: -3.8%

Fitch: -1.2% Deutsche Bank -4%

JP Morgan: -1.3%

HSBC: -2%

49

Our latest assessment

• With global recession now underway, worst is yet to come; timing of recovery

depends on effectiveness of stimulus packages by major economies

• HK economy likely to experience negative growth for several quarters, leading

to further job losses and rising unemployment

• Government’s efforts to ease credit access and create employment to render

some help during this difficult period; support from the Central Government a

confidence booster

• Inflation will come down visibly, which should help enhance competitiveness

• Confidence is key; HK economy set to recover once the external environment

improves

50

End

Documents

Update on the Hong Kong Economy for The Task Force on Economic Challenges Government Economist