HONG KONG 2004 - The Economy

Hong Kong's external trade had another year of impressive performance in 2004. Apart from buoyant global and regional demand, continued weakness of the US dollar rendered a further boost to Hong Kong's external competitiveness. Total exports of goods (comprising re-exports and domestic exports) leaped by 15.3 per cent in real terms in 2004, up even further from the already strong growth of 14 per cent in 2003. There were double-digit increases in all four quarters of the year, and by the fourth quarter of 2004, total exports had sustained double-digit growth for five straight quarters. On a seasonally adjusted quarter-to-quarter comparison, total exports of goods rose strongly during the first two quarters of 2004, settled back somewhat in the third quarter, before bouncing back strongly in the fourth quarter.

Re-exports continued to outperform overall export growth, surging by a further 16.3 per cent in 2004, following 16.1 per cent increase in 2003. Benefitting from the Mainland's buoyant trade flows in the year, and also reflecting Hong Kong's prominent role as the trade conduit between the Mainland and the rest of the world, Hong Kong's re-export trade involving the Mainland was robust throughout 2004.

Despite the continuing drag from the structural shift to re-exports and offshore trade, domestic exports bounced up to a modest 2.4 per cent increase in 2004, the first growth since 2000. The growth was most remarkable in the fourth quarter due to a significant rebound in exports to the Mainland, possibly as the boost from CEPA progressively showed up.

In 2004, the Mainland and the United States were the two largest markets for Hong Kong's total exports (including domestic exports and re-exports), accounting for 44 per cent and 17 per cent respectively of the total. Other major markets included Japan (5 per cent), the United Kingdom (3 per cent), Germany (3 per cent), Taiwan (2 per cent), the Republic of Korea (2 per cent), and Singapore (2 per cent).

Mirroring closely the expansion in re-export trade, and also with a notable growth in import intake for local use, imports of goods likewise flourished, surging by 14.1 per cent in real terms in 2004. Imports of goods sourced from East Asian markets performed particularly well, with imports from the Mainland — the largest source of Hong Kong's imports — attained an even more marked growth in 2004. Within total imports of goods, retained imports of capital goods, particularly industrial machinery for manufacturing use, and telecommunications equipment, picked up visibly in 2004, as investment sentiment turned more sanguine and as the more established economic recovery necessitated further expansion in productive capacity to meet increased demand (Chart 7).

With the increase in value of imports of goods exceeding that of total exports of goods, the visible trade deficit reckoned on a GDP basis widened in absolute terms, to $72.5 billion or 3.5 per cent of the value of imports of goods in 2004, from $45.0 billion or 2.5 per cent in 2003.

On invisible trade, exports of services sustained strong growth momentum in 2004, with the setback caused by SARS now well behind. For 2004 as a whole, there was a 15 per cent leap in real terms, much faster than the 8.1 per cent increase in 2003. The pick-up in exports of services was across-the-board, marked by highly distinct growth throughout the four quarters of 2004. The pace of the upturn was remarkable, even after allowing for the distortion caused by SARS in the second quarter of 2003.

The robustness of exports of services in 2004 was due in large part to the further surge in trade-related services, the largest component within exports of services. The region-wide trade boom, and more importantly, surging trade flows involving the Mainland, underpinned the fast growth in offshore trade. Exports of transportation services also picked up strongly, as passenger services were buoyed by a strong influx of incoming visitors, while cargo services thrived upon the lively external trade. Exports of travel services rebounded strongly, with record-breaking numbers of visitor arrivals during the year. Not only did the number of visitors from the Mainland jump to a record-high in the year, those from most other sources also surpassed the pre-SARS levels well before the year-end. Meanwhile, exports of finance, business and other services posted a notable growth along with the increase in business activities.

Imports of services reverted to a substantial 10.7 per cent leap in real terms in 2004, after the setback caused by SARS led to a 2.1 per cent decline in 2003. As with exports of services, imports of services had a quarterly profile distorted by the SARS outbreak in 2003, with a much magnified increase attained in the second quarter of 2004 but still solid increases in the other three quarters. Imports of travel services, the largest component within imports of services, rose distinctly in 2004 after the plunge in 2003. Imports of transportation services also benefited from the rebound in residents spending abroad, boosted further by a sharp rise in incoming cargoes. Imports of trade-related services had another year of distinct growth on the back of soaring offshore trade. Imports of finance, business and other services also strengthened amid the activity upturn.

As exports of services rose faster than imports of services, the invisible trade surplus reckoned on a GDP basis expanded further to $185 billion or 79.7 per cent of the value of imports of services in 2004, from $153.4 billion or 76 per cent in 2003. This more than offset the enlarged visible trade deficit to yield a combined surplus of $112.5 billion in 2004, equivalent to 4.8 per cent of the total value of imports of goods and services in that year, as compared with $108.4 billion or 5.4 per cent in 2003 (Chart 8).

Local consumer spending maintained notable growth throughout the year, as consumers' willingness to spend was well underpinned by optimism over the economic outlook, improving labour market conditions, and the wealth effect from the rebound in property prices. Private consumption expenditure (PCE) grew by 5.7 per cent, 10.9 per cent, 5.3 per cent and 5.9 per cent respectively in real terms in the four quarters over a year earlier, producing a 6.9 per cent growth for 2004, as a whole, the fastest since 1993. The high growth in the second quarter was in part inflated by an exceptionally low base caused by SARS in 2003. On a seasonally adjusted quarter-to-quarter comparison, PCE grew by 1.0 per cent and 2.2 per cent in real terms in the first and second quarters, eased back to 0.2 per cent increase in the third quarter, and then picked up again to 2 per cent growth in the fourth quarter.

Overall investment spending in terms of gross domestic fixed capital formation attained 4.1 per cent growth in real terms in 2004, the fastest since 2000, as the activity upturn and brighter business outlook prompted a broad-based surge in machinery and equipment investment to fuel business growth. Worth noting was that investment in industrial machinery for manufacturing use, which has been on a general fall-off in recent years, also rebounded significantly in the year.

On the other hand, building and construction output remained generally slack in 2004, with overall expenditure on building and construction falling by 11.1 per cent in real terms in 2004, following a 5.6 per cent decline in 2003. Expenditure on building and construction in both the private and public sectors fell, by 13.7 per cent and 5.7 per cent respectively. While private sector building activity was dampened by the earlier sluggishness in the property market, public sector output was dragged down by the further shrinkage in works under the Public Housing Programme and the completion of several priority railway projects, including West Rail, the KCRC East Rail extension to Tsim Sha Tsui and Ma On Shan Rail (Chart 9).

As reflected in GDP by major economic sector at constant prices, net output or value added for all the service sectors taken together grew markedly by an average of 8.8 per cent in real terms in 2004 over a year earlier, almost double the 4.5 per cent gain in 2003. Sustained recovery in local consumer demand, robust trade performance and vibrant inbound tourism were the major contributory factors. Analysed by constituent sector and in real terms, net output in transport, storage and communications rose most sharply, by 17 per cent in 2004, backed by a surge in merchandise trade flows amid vibrant global demand and by a continued proliferation of the telecommunications industry particularly of mobile phone and international telephone services. Meanwhile, net output in the wholesale, retail and import/export trades, restaurants and hotels also registered robust growth, at 13.3 per cent. Continued recovery in local consumer demand, remarkable trade performance, and resurgence in inbound tourism all contributed. Meanwhile, net output in finance, insurance, real estate and business services recorded an 8 per cent increase, led mainly by the improved performance of the banking sector. Fees and commission earned by banks showed particularly strong growth, along with the rapid development in various personal banking services and fund management. Net output in community, social and personal services firmed up to 3.9 per cent growth, with a particularly distinct rebound in recreation and entertainment services, in line with better consumer sentiment and improved labour market conditions.

For the manufacturing sector, under the support of a highly favourable trading environment, net output posted a 2.9 per cent growth in real terms in 2004, as against a 9.1 per cent drop in 2003. To promote wider use of design and innovation in industries to help them move up the value chain, and ultimately turn Hong Kong into a focal point of design excellence in the region, the Government set up the DesignSmart Initiative in June 2004, which includes a Design Support Programme and establishment of an Inno Centre. As to the construction sector, overall construction activity remained slack, with net output in this sector falling by 8.5 per cent in 2004 after a 4.6 per cent decline in 2003. The fall-off was the combined result of the completion of some prominent private sector building projects, a further drop in output under the Public Housing Programme, and the completion or winding down of railway projects.

The labour market improved progressively on a broad front throughout 2004, as economic growth gathered momentum and extended scope. The seasonally adjusted unemployment rate and the number of unemployed both fell steadily during the year, to 6.5 per cent and 226 900 respectively in the fourth quarter. These represented the lowest levels since November 2001 to January 2002. For 2004 as a whole, the unemployment rate and the number of unemployed averaged 6.8 per cent and 241 400 respectively. Though still high by historical standards, they were lower than those of 7.9 per cent and 277 200 in 2003. This decrease, whilet occurring extensively across many economic sectors, was most apparent in construction and the tourism and consumption-related sectors. Furthermore, the median duration of unemployment shortened from 109 days at end-2003 to 99 days at end-2004.

The underemployment rate also came down during 2004, albeit less visibly, to 3.1 per cent. So did the number of underemployed, to 110 800. For 2004 as a whole, the underemployment rate and the number of underemployed averaged 3.3 per cent and 116 200, respectively, below those of 3.5 per cent and 123 300 in 2003. The decrease was concentrated in the restaurants, hotels and transport sectors. This was partly due to a shift in the employment composition from part-time and temporary workers to full-time workers, as more full-time jobs became available amid continued pick-up in business activity (Chart 10).

The total labour force stayed on a steady growth path, expanding by 0.3 per cent in 2003 and by 0.9 per cent in 2004. The latest increase was attributable entirely to an expansion in the population of working age by 1.1 per cent, more than offsetting the decline in the labour force participation rate, especially for male workers aged 15-24 and 50-59.

By comparison, overall labour demand showed a more notable increase in 2004. This was manifested not only by more intensive utilisation of existing manpower resources, but also by increased job openings and employment of additional staff. As an indicator, total employment as enumerated from households rose by 2.1 per cent in 2004, reversing the 0.4 per cent fall in 2003. Growth was modest in the first quarter, but picked up momentum the rest of the year. At end-2004, total employment reached an all-time high of 3.33 million. Compared with the trough in mid-2003, this represented a large gain of 139 400 or 4.4 per cent. Much of the growth occurred among higher skilled workers in the import/export trade and financing and education services sectors, as well as among the lower skilled ones including service workers and shop sales workers in the wholesale/retail trade, restaurants and miscellaneous personal services sectors, craft and related workers in the construction sector, and workers in elementary occupations in the transport and real estate sectors. Also, the more experienced workers aged 40 to 59 seemed to have benefited more from the improved employment situation (Chart 11).

Total employment as enumerated from private sector establishments likewise went up appreciably by 3.1 per cent in December 2004 over a year earlier. This was attributable entirely to a 4 per cent increase in the service sectors, with growth impetus coming from all broad service sectors. For 2004 as a whole, total employment in the private sector was 2.4 per cent higher than in 2003. The corresponding growth rate for the service sectors was 3.2 per cent.

The local manufacturing sector registered a reduction in employment by 1.8 per cent in December 2004 from a year earlier, owing to continued relocation of production across the boundary. Employment of manual workers at building and construction sites likewise shrank, by 9.4 per cent over the same period, consequential to the scale-back in the Public Housing Programme and winding down or completion of several major civil engineering projects. For 2004 as a whole, employment in these two non-service sectors fell by 3 per cent and 6 per cent respectively.

Job vacancies in the private sector have reverted to an uptrend since the latter part of 2003. In December 2004, the total number of private sector vacancies jumped by 39.8 per cent over a year earlier. For 2004 as a whole, the increase was more impressive, at 55.8 per cent.

Growth over the past year was broadly based in general, whether analysed by economic sector or by occupational category. Vacancies in both the service sector and the manufacturing sector went up significantly by 39 per cent and 61.7 per cent respectively. Meanwhile, notable gains were also observed across various occupational categories. More specifically, vacancies at the lower and upper segments leaped by 15.8-82.9 per cent and 29.6-99.2 per cent respectively in December 2004 over a year earlier.

Labour income, as a lagging indicator, remained soft in money terms, but the decrease was smaller in 2004 than in 2003. Specifically, overall labour earnings in the private sector, as measured by payroll per person engaged, edged lower by 0.6 per cent year-on-year in money terms in the fourth quarter of 2004 and by 0.7 per cent in 2004 (Chart 12). In real terms, the corresponding decreases where 0.9 and 0.2 per cent.

Analysed by economic sector, labour earnings in the service sectors exhibited divergent movements. While year-on-year increases in money terms were observed for the wholesale and import/export trades, restaurants and hotels, financing, insurance, real estate, and miscellaneous personal services in the fourth quarter of 2004, these were more than offset by declines in other sectors such as the retail trade, land transport and business services. For all the service sectors taken together, labour earnings were down by 0.7 per cent in money terms or 0.9 per cent in real terms. Over the same period, labour earnings in the local manufacturing sector nevertheless increased mildly by 0.3 per cent in money terms or 0.1 per cent in real terms.

Overall labour wages in the private sector, excluding the irregular payment items, edged lower, by 1.3 per cent in money terms or 1.7 per cent in real terms in December 2004 from a year earlier. For 2004 as a whole, the corresponding decreases were 1.1 per cent and 1.2 per cent.

Analysed by economic sector, wages in the service sectors were adjusted downwards by 1.1-1.8 per cent in money terms in December 2004 from a year earlier, save for those in personal services, which were lifted by 1.8 per cent attributable to pay hikes at barber and beauty shops. In real terms, there were wage decreases of 1.6-2.3 per cent for most service sectors, but a 1.3 per cent rise for personal services. In the manufacturing and construction sectors, wages were down by 1.7 per cent and 2.6 per cent respectively in money terms, corresponding to decreases of 2.2 per cent and 3 per cent in real terms.

The property market continued to pick up markedly in early 2004 in terms of both prices and trading activity, as market sentiment improved during the economic upturn. The low interest rate environment amid keen competition in the mortgage loan market rendered further support to the property market. Following a brief consolidation in mid-year caused by concerns over higher interest rates, economic tightening measures in the Mainland and the oil price upsurge, the property market perked up again in the latter part of the year as local economic fundamentals continued to strengthen and deflation ended. The sales market for residential property appeared to have been stimulated by favourable land auction results in June and by removal of the security of tenure provisions for domestic tenancies in early July. Expansion of the Mortgage Insurance Programme between late July and the year-end also helped lift end-user demand.

The sales market for residential property was buoyant for 2004 as a whole, with particularly hectic trading activity in the secondary market. Flat prices in both the mass market and the luxury market rose markedly during the year, particularly in the luxury market. On a quarter-to-quarter comparison, flat prices in the first quarter of 2004 registered the first double-digit increase in the past seven years, followed by modest rises in the ensuing three quarters. By the fourth quarter of 2004, overall flat prices have soared by an average of 30 per cent over the same quarter in 2003, the highest price level since the fourth quarter of 2000. As to the rental market, flat rentals picked up steadily throughout 2004, and were 11 per cent higher in the fourth quarter of 2004 than a year earlier. Yet compared with their peaks in the third quarter of 1997, flat prices and rentals in the fourth quarter of 2004 were still substantially lower, on average by 51 per cent and 42 per cent respectively (Chart 13).

On commercial property, bolstered by keen investor interest amid an optimistic business outlook, the sales market for office space picked up sharply in the first quarter of 2004 and stayed buoyant in the second quarter. It then went through a brief consolidation in the third quarter owing to uncertainties in the external environment, but bounced back swiftly in the fourth quarter as local business activity continued to prosper. By the fourth quarter of 2004, prices for office space on average have surged by 65 per cent from a year earlier. Office rentals also picked up during most of 2004, with rentals of Grade A office space registering the strongest increase. There was ongoing upgrading and relocation of office space from the fringe areas to quality premises in the prime locations, as rentals of Grade A office space had fallen to an attractive level and as business activity saw further growth. In the fourth quarter of 2004, office rentals were up by an average of 12 per cent over a year earlier. Against their respective peak levels in 1994, prices and rentals for office space in the fourth quarter of 2004 were lower by an average of 53 per cent and 57 per cent (Chart 14).

The sales and rental markets for shopping space were generally supported by brisk retail activity amid continued revival in local consumer demand and buoyant inbound tourism in 2004. Retail premises in popular locations and in better-managed shopping malls were in particularly strong demand. In the fourth quarter of 2004, prices and rentals for shopping space rose on average by 40 per cent and 10 per cent respectively over the fourth quarter of 2003, but were on average 31 per cent and 23 per cent lower than their respective peaks in the third quarter of 1997.

On industrial property, with end-user demand strengthened by buoyant export growth and investor sentiment apparently lifted by CEPA, prices for flatted factory space registered appreciable increases throughout 2004. In the fourth quarter of 2004, prices for flatted factory space rose by 34 per cent over a year earlier. Concurrently, rentals of industrial space also picked up, albeit at a much slower pace, by 6 per cent over the same period. Compared with their peaks in 1994, prices and rentals for industrial space in the fourth quarter of 2004 were still significantly lower, by an average of 56 per cent and 48 per cent respectively.

Regarding supply of new property, completions of private residential flats declined by 1 per cent in 2004 to 26 000 units, smaller than the 15 per cent drop in 2003. On the other hand, completions of office space fell by 6 per cent in terms of internal floor area in 2004, having surged by 80 per cent in 2003. Completions of other commercial premises likewise declined, by 23 per cent in 2004, following a 15 per cent fall in 2003. Completions of conventional flatted factory space in 2004 were only 800 square metres, after nil completions in 2003. There were nil completions of industrial-cum-office space in 2004, following completions of 14 800 square metres in 2003. With an across-the-board rise in new take-ups, vacancy rates for almost all types of property in the private sector decreased, to 6.2 per cent for residential flats, 12.7 per cent for office space, 10.8 per cent for shopping space, 8.7 per cent for conventional flatted factory space, and 11.1 per cent for industrial-cum-office space at end-2004.

Property transactions, as measured by agreements for sale and purchase of property registered with the Land Registry, leaped by 41 per cent in number and 86 per cent in value in 2004, much faster than the modest 2 per cent increase in both number and total value in 2003. While the upsurge reflected the revival of the property market over the course of 2004, it was also partly attributable to a low base of comparison for the early part of the year due to the SARS impact in 2003. Within the total, transactions of residential property soared by 41 per cent in number and 80 per cent in value in 2004, while the respective increases for non-residential property were even stronger, at 45 per cent and 109 per cent (Chart 15).

The economy came out of a protracted period of deflation that has started since November 1998. As the pricing power of retailers returned along with the economic recovery, the rise in import prices stemming from a weak dollar and firming world commodity prices was more readily passed through to the retail price level. Prices of a wide range of consumer goods and services thus resumed increases after early 2004. Yet price pressures on the consumption front remained modest all through the second half of 2004, as wages and earnings remains subdued in overall terms, while the rebound in property rentals over the previous year had yet to show up fully. On a year-on-year basis, the declines in both the Composite Consumer Price Index (CCPI) and the GDP deflator tapered successively over the course of the year, with the former reverting to small increases in the second half. Yet the pace of upturn in the GDP deflator was considerably slower than that of the Composite CPI, due to the drag from worsened terms of trade caused by the further weakening of the US dollar. For 2004 as a whole, the declines in the CCPI and GDP deflator narrowed to 0.4 per cent and 2.8 per cent respectively (Chart 16).