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20 March, 2002 Deflationary Conditions in HK |
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High level of costs in HK
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(a)
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If one compares HK with London or New York, then HK is not expensive. If one compares HK with Singapore or Manila, then HK is expensive. But HK is not competing with Manila, and less and less with Singapore. |
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(b)
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Increasingly, it is clear to HK that it could not compete just by cutting costs, or by devaluating the HKD. There is no way HK could compete with its neighbours through lower costs. The only way out is to move up the value chain. My article on HK's strategic re-positioning elaborates this point in more detail. |
Are price falls in HK going to end up in a deflationary spiral?
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(c)
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Prices in HK are falling as a result of demand and supply -- this is what I would call good deflation. Different prices fall at different rates. Property prices and rents have fallen drastically, so have hotel rates. Wages for high end jobs have not fallen very much, but there is a higher level of unemployment. Wages for low end jobs have fallen a lot. Measured by the consumer price index, prices have fallen by a total of around 12% since May 1998 (when deflation started). But measured in terms of residential property, prices have fallen by about 60% since August 1997. |
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(d)
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Our forecast is for the CPI to fall by around 3.5% - 4% this year. About 1.5% of this fall is due to the various concessionary measures introduced by the Government in the Budget (such as cutting rates on property, water charges, etc.) In other words, the underlying rate of deflation is around 2.5% -- a lot of this is due to the fall in residential property rents. |
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(e)
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HK is an open economy and growth prospects are much more dependent on its external environment. In contrast, a deflationary spiral is more likely to happen in a closed economy. Japan's exports of goods and services are the equivalent of 11% of GDP. The number for HK is 150%. |
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(f)
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To kickstart the HK economy, a critical dimension is how to leverage on the growth in China (apart from a recovery in global economic conditions). This is why I put so much emphasis in my earlier paper on the need to unblock the obstacles that impede economic interaction between HK and the Mainland. |
HK lacks a "feel good factor" now
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(g)
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Property prices in HK are now a lot more affordable, and the underlying demand (largely an upgrading demand) remains there. However, like London in the early 1990s, the negative equity problem in the housing market will take some time to unwind itself. In the mean time, there is a lack of the "feel good factor" in HK. |
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(h)
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I see the HK economy and the property market bottoming out gradually in the course of 2002. But property prices are likely to move sideways for some time until the economy gathers more momentum. |
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(i)
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Our forecast of 1% growth in 2002 represents negative growth in the first half and a rebound to a 3% growth rate in the second half of the year. |
K.C. Kwok |
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