With global uncertainty, high inflation and increased risk of recession, Hong Kong should prepare to face economic headwinds. Oswald Chen reports.

William Tang is the general manager of Alpha Creative Manufacturing Ltd in Hong Kong. The company is primarily engaged in accessories and garment production for US and European retailers and importers. But he's not particularly optimistic about the future of his business.

"Judging from the current economic situation in the US and Europe, I predict the company's business order intake will worsen in the next two years as US and European retailers and importers do not have sufficient money to place more business orders" Tang said.

"The local export sector has yet to recover from the financial crisis in 2008, judging from my experience in the industry," Tang said. "The company's business intake since 2008 has dropped by 70 to 80 percent compared with the years before 2008."

"All my major US and European clients were already bankrupted during the financial crisis in 2008. I have worked very hard to find new US and European customers to keep the business running," Tang said.

And in addition to faltering global demand, the rise of production costs on the mainland propelled by the rising yuan and hike in labor and material costs will further crimp profit margins, Tang reckoned.

The company will reduce all unnecessary expenses and find more clients to keep the business going, but staff layoffs may inevitably be involved, Tang said. "I have already slashed 60 percent of staff since 2008 and I may axe another 15 percent in the near future."

The bleak outlook for the local export sector was echoed by the Hong Kong Trade Development Council's latest Export Index, which showed it had edged down to 49.5 in the third quarter from 53.8 in the second quarter, suggesting that local exporters are increasingly bearish about the local export sector. A reading below 50 on the index points to contraction.

And official economic data has already confirmed the slow-down of the local export sector. According to Hong Kong government data, total goods exported in the second quarter of 2011 was up just marginally at 0.3 percent on an annual basis. This represented a sharp contraction from the 16.8 percent increase in the first quarter, albeit having a lower base of comparison.

The August figures again confirmed that the local export sector is staggering. It only rose 6.8 percent compared with a year earlier, compared to a year-on-year increase of 9.3 percent in July.

Though domestic consumption, government expenditure and private investment remain resilient, the sharp decline in the export sector has taken its toll on the city's economic performance to the extent that economic growth decelerated rapidly from 7.5 percent year-on-year in the first quarter to 5.1 percent in the second quarter. The city's GDP in the second quarter also contracted by 0.5 percent on a quarterly basis from end March to end June.

"Local economic growth will probably slow down next year as the local export sector is faltering due to weak global market demand and the soaring operating costs on the mainland. Moreover, if any European country really defaults on their debts, it will trigger severe repercussions on the global financial system that will inevitably push up the local unemployment rate next year," Simon Lee, a senior instructor in the Chinese University of Hong Kong's Business Administration faculty told China Daily.

It depends on whether the local finance industry's contribution to economic growth can offset the decline in the local export sector, Lee added.

Amid slowing economic growth, cost of living in the city continued to soar with underlying inflation jumping from 5.8 percent in July to 6.3 percent in August. This was mainly attributed to a surge in food prices, travel expenses and private housing rents. The government also predicts that higher consumer prices may be around for a while before it begins to recedes.

"Imported inflation in the city is unlikely to recede in the near future as yuan appreciation prospects will still propel local prices to rise further," Lee cautioned.

"As local economic growth may slow down, the unemployment rate could also shoot up and with inflation hard to control, the city's economy could even face the risk of stagflation," Lee said.

Although the labor market is still buoyant at this stage, one employment agency said that the city should not be complacent as the global macroeconomic environment could change rapidly enough that employers turn cautious and scale down their recruitment plans.

"The local financial services, real estate and other export-related industries such as trading, manufacturing and logistics industries are already trimming their recruitment scales so that their recruitment advertising has declined 5 to 10 percent in the third quarter compared with the second quarter," Centaline Human Resources Consultancy Managing Director Alexa Chow said.

"If the global macroeconomic situation continue to worsen drastically, it is probable that the local unemployment rate may rise above 4 percent next year as local employers are very quick at adjusting their recruitment programs," Chow warned, adding that lower corporate recruitment demands means that salaries could remain flat.

The largest bank in the city, Hong Kong and Shanghai Banking Corporation Limited (HSBC), recently announced that it will slash 3,000 jobs in the city over the next three years. It is expected many local banks will follow the lead of HSBC and lay off more staff to save costs amid increasing market uncertainty, another factor which may push up the local unemployment rate.

Secretary for Labour & Welfare Matthew Cheung, in statement on September 20, warned that employers have become more cautious about recruiting due to the deepening Eurozone sovereign debt crisis and the fragile US economy. The government announced earlier that the city's unemployment rate dropped to a13-year low of 3.2 percent in the three months ended August.

oswald@chinadailyhk.com

(HK Edition 09/29/2011 page2)