Hong Kong's retail sales will slow further and real growth is likely to dip below 5 percent in the third quarter after easing in the first half of the year.

Retail sales have moderated since the beginning of 2012 with real growth falling to 9.1 percent year-on-year year-to-date (YTD), from the 18.5 percent in 2011. Consumption has been muted by slowing inbound tourism, poor domestic consumption sentiment and falling external demand.

Mounting global risks -- including the European sovereign debt crisis, potential financial market volatility and the economic slowdown on the mainland-- all bode poorly for Hong Kong's growth prospects in the second half.

Retail sales growth has been easing since the second half of 2012, with the total retail sales value growing only 13.6 percent year-on-year YTD versus the 25.3 percent increase in the second half of 2011.

The decline was attributed to weakness across the board, but in particular to deterioration in the once thriving jewelry sector. Apparel and department stores are likely to suffer due to the high comparison basis.

While local consumption is slumping amid the volatile financial markets and fragile economic conditions, record-low tourist arrivals also put a drag on retail sales.

Tourist arrivals, a major indicator of consumption trends, slid from an average of 18 percent year-on-year in the second half of 2011 to 15 percent YTD in the first half of 2012. The month of May marked a record low for tourist arrivals since February 2011, with a 13 percent YoY growth. Not surprisingly, May also marked a record low in retail sales. Mainland visitor arrivals shrank from 26 percent on average in the second half of 2011 to 21 percent YTD in the first half of this year. Tourist spending accounts for about one-third of retail sales in Hong Kong so more downside pressure is expected on retail sales in the third quarter.

To a certain extent, falling inflation also drags down the retail sales in nominal terms. Consumer prices saw 3.7 percent year-on-year growth in June 2012 compared with the 6.1 percent at the beginning of the year. Given slowing volume growth in retail sales, downward pricing pressure is likely to continue to drag down nominal retail sales in the third quarter.

Skyrocketing rents in the city and the establishment of a minimum wage on the mainland have conspired to dampen industry sentiment in the first half of this year. Weakening demand in part due to high rental and labor costs are likely to curtail retailer profits in the third quarter.

Certain retail sub-sectors including restaurants, cosmetics and consumer electronics may be able to generate healthy sales growth. In contrast, luxury products like jewelry will face weak growth momentum in the third quarter.

The author is chief economist at CCBI. The opinions expressed here are entirely his own.

(HK Edition 08/01/2012 page2)