Singapore, Hong Kong Catch Cold from Neighbors

Singapore, Hong Kong Catch Cold from Neighbors

Tale of two cities

The economies of Asia’s prosperous city-states Hong Kong and Singapore seem set to be about the worst economic performers in Asia this year as world trade falters and the air goes out of once buoyant property markets.

Hong Kong’s Financial Secretary, John Tsang, has just forecast growth of 1-2 percent in 2016 after 2.5 percent last year. But for once the official forecast may prove optimistic. The evidence of sharp slowdown is almost everywhere. For a start, the Hong Kong dollar money supply has been static since last May and loans and advances for local use have increased only marginally, with continued growth in residential mortgages offsetting declines in other sectors.

But even the residential sector is heading for trouble with values already down by about 10 percent from their 2015 peak and further declines expected as more new projects come to market, inflow from the mainland languishes and possible interest rate increases further damage sentiment.

Goods exports and tourism both fell slightly in 2015. The strength of the pegged Hong Kong dollar is a deterrent for most categories of visitors and mainland ones have other issues with a public irritated by mass low-value tourism from China. Goods exports (almost all re-exports) may stabilize but Guangdong no longer the center of Chinese export growth and Hong Kong anyway is losing ground to other ports.

Crackdown on Tax Dodge?

The territory may also suffer if the mainland cracks down on the re-invoicing via Hong Kong which is used to reduce tax levels or to evade mainland capital controls.

Infrastructure and housing construction had been fairly buoyant but now seem on a plateau. Financial services remain a strongpoint but increasingly dependent on mainland stock listings and Yuan forex trading, both of which face obstacles in the light of recent financial market turmoil on the mainland and weakness of loan demand elsewhere in the region. 

Growth last year was mostly underpinned by consumption, which accounts for 66 percent of GDP. It was up 4.8 percent assisted by stable unemployment, a 4.4 percent rise in wages and 1.3 percent rise in the workforce. However, whether these can continue is debatable. Government spending will rise but the private sector faces problems of the turn in property market sentiment and likely fall off in labour demand. Tsang noted with concern a decline in labor demand in the inbound tourism sector.

Tax cuts will benefit households and for the first time in several years a probable return to budget balance will end the contractionary impact of large budget surpluses on the economy. On the other hand the outlook for further increases in real wages is poor unless consumer prices stop rising.

Consumer Prices on the Rise

Hong Kong also faces higher consumer price inflation than might be expected at a time when deflation if more of a global problem, and a strong currency should be lowering import prices for consumption goods, especially those from the mainland, and fuels. The government is expecting further consumer price inflation of 2 percent this year. The persistence of inflation is partly related to the delayed impact of earlier rises in residential rents but it probably also reflects oligopolies and inefficiencies in the retail, utility and fuel sectors.

Hong Kong prices have been in sharp contrast to those in Singapore which fell 0.5 percent in 2015 and this year are forecast at between minus 0.5 percent and plus 0.5 percent. This performance was despite a 9 percent decline in the Singapore dollar against the US currency.

Singapore Catches Cold From Neighbors

Singapore has been hurt by the troubles of neighbors Malaysia and Indonesia due to the commodity price collapse as well as by problems in oil-related businesses, which make up about 4 percent of gross domestic product. However Southeast Asian economies are proving quite resilient so the government is now forecasting 1-3 percent growth in 2016. As in Hong Kong, financial services have been the leading source of growth as goods trade has fallen.

Employment growth has slowed to near zero after years of rapid increase but the brunt of weakness in the economy, notably manufacturing, may have been borne by the non-resident 38 percent of the population who take the bulk of low-value jobs. Last year saw the income of resident households rise by a remarkable 5 percent which helped consumption growth.

But this must have been at the expense of the incomes of corporate, government and non-resident workers. This non-resident cheap labor force explains why 66 percent of the population is in the labor force compared with 54 percent in Hong Kong. It may also possibly indicate that Singapore will begin to reduce the investment share of GDP as its resident population ages and the economy shifts away from manufacturing towards financial services. Private consumption is a mere 36 percent of GDP due to the high level of forced savings, and remittances of earnings by workers and foreign corporations.