By Peter Ip
At the risk of courting the umbrage of the editor of this esteemed publication, who – in the event – would never entrust another writing assignment to this scribbler, let me make it be known at the outset that it is not exactly with joy and happiness that I have undertaken to compose this piece whose intent is to review the performance of Hong Kong’s jewellery industry during the past year and preview its prospects for the one yet to come, for 2014 has, without hyperbole, been a stressful and distasteful year, while 2015 threatens to be one fraught with uncertainty; and I am loath to be the bearer of bad news.
Nothing to write home about in 2014
So if the year of the horse, which has now receded into history, was bad, how bad was it? To hit the nail on the head, it hurt on both the external and, especially, domestic fronts. At the time of writing, it was end-January and the data germane to our purpose was available only up to the penultimate month of the year past. But unless the miracle of miracles transpired in December, the general thrust of things in 2014 would not have been reversed or altered out of recognition by what was obtained in the closing month of the year.
Here at home, on a 12-month-to-date (12mtd) basis, the retail sales value of jewellery, watches, clocks and valuable gifts had plummeted into negative territory for six consecutive months by November in year-on-year (yoy) terms: the absolute value of HK$104 billion for November was a humongous amount but it had slumped 11.4 percent. On a three-month-moving-average (3mma) basis, jewellery sales had fallen yoy for eight months in a row by October; and this comment applies to measurements in both nominal and volume terms.
That was insofar as domestic jewellery sales were concerned. What of external shipments? In November, the 12mtd value of total jewellery exports amounted to HK$59.82 billion, up 5.6 percent yoy. This was a climb-down from the 8.1 percent gain obtained in November 2013, after which there was an enervating patch; last July, growth had slid to an anaemic 0.7 percent. Thereafter, the yoy comparisons became more favourable, edging higher. That was thanks exclusively to re-exports, however, as they now typically account for a whopping 85 percent of total jewellery exports. By November, the 12mtd value of re-exports had actually grown faster for four months running, being up 7.7 percent, in stark contrast to the 6.8 percent decrease chalked up by domestic exports for that month, the latter’s 15th yoy fall.
America reigns supreme near-term
As I am guilty of saying ad nauseam, crystal gazing is always unreliable but, in all likelihood, no more so than in times as vicissitudinous as at present. Thus, whether recent improvements in jewellery re-exports and, by extension, total exports can be sustained or even augmented have yet to be seen. At this juncture, the omens are as mixed as ever, rendering any reading of the tea leaves difficult.
At the end of October, Nouriel Roubini, the New York University professor of economics not infrequently dubbed Dr Doom because of his eyebrows-raising dire prognostications, wrote from Tokyo: “The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).”
His observation has essentially been borne out by events and developments since.
For 2014 as a whole, US real gross domestic product (GDP) grew 2.4 percent. Although far from the 4 percent growth of the late 1990s, this was actually a shade better than the sluggish average of the nearly six-year-old recovery. December-quarter real GDP was 2.6 percent higher yoy, just over half the summer’s torrid 5 percent pace. The latter was inflated in part by a military spending spree that could not be repeated. Still, America’s is the only major economy whose growth forecast for 2015 and beyond has been upgraded by virtually all and sundry.
It should also be noted that, as The Wall Street Journal reported on 30 January: “Consumers held up their end of the deal in the final quarter of the year. Friday’s report showed personal consumption expenditures rose 4.3 percent, the biggest gain since the first quarter of 2006. Americans have been particularly upbeat lately, with the Conference Board’s index of consumer confidence jumping to its highest since August 2007 this month. Stronger hiring and cheaper gasoline, which leave more discretionary income for most people, are likely behind the brighter outlook. Consumer spending accounts for about 70 percent of demand in the US economy.”
To that I must add that there are signs – tentative and halting at present yet increasingly perceptible – that the wage and salary gains that have evaded the working, middle class for so long (too long in fact) are making a re-entry into the economic scene. This icing on the cake is to be welcomed with open arms, particularly as the cake in itself is getting bigger.
That is as far as the good news goes. And now for a few words of caution. To borrow from Yale University’s Stephen S Roach, formerly chairman of Morgan Stanley Asia: “The US’s recovery from the 2008 financial crisis has led to widespread hope that America has the capacity to stay the course and provide a backstop for the rest of the world in the midst of the euro crisis. But a closer analysis of America’s recent economic growth suggests that the economy may be even more vulnerable to foreign crises than before.”
Now I am not as fretful and concerned as Mr Roach is. Nevertheless, I must concede that the issue flagged in the depths of the Asian financial crisis in 1998 by Alan Greenspan, the then chairman of the Federal Reserve, that the US may not continue indefinitely as an oasis of prosperity in an otherwise struggling world, has never gone with the wind.
And the rest of the globe, not least the developed economies, is indeed struggling. “Secular stagnation” is the operative word. Europe is teetering on the precipice of deflationary recession. For the European Central Bank, it can be argued that the Rubicon has been crossed. But its quantitative easing, announced only last month and to be implemented only in March, does not quite fit the billing of “whatever it takes”. Put differently, it may be a case of “too little, too late”.
In Japan, Abenomics began on a promising note in December 2012 but appeared to have lost traction and impact as time went by. Fiscal activism as well as the Bank of Japan’s quantitative and qualitative easing is encountering diminishing returns while structural reforms, the third arrow in prime minister Shinzo Abe’s quiver, has yet to be unleashed towards the target. Meanwhile, deflation and recession have staged a comeback in Nippon-koku.
But China towers in importance longer-term
Thus, it would seem that at the present crossroads, the United States is almost the only game in town. Local jewellers would do well to persist with making further – and faster – inroads into the American market: currently – and for as long as the eye can see – its extraordinary cyclical significance is not to be doubted. Elsewhere, the commodity-producing economic entities, particularly those dependent on oil as their lifeline, are suffering as the prices of their output have taken a beating in world markets and will, on present indications, continue to be depressed near-term.
Even China, the erstwhile post-crisis locomotive of the global economy, has been slowing down markedly to what is now dubbed – even officially – as the new normal, namely, a real GDP growth range centring on 7 percent. In 2014, China’s economy expanded 7.4 percent – a solid performance for today’s major economies but a far cry from the double digits of the recent past. Disappointing factory and services data for January suggested that this year will also be a hard slog. Nevertheless, it is in the motherland that Hong Kong people in general and local jewellers in particular should trust and look to for inspiration and sustenance.
The reason is that while domestic jewellery retail sales during 2014 have been adversely affected by the austerity campaign that has been waged on the mainland for longer and far wider than almost everybody could have expected beforehand, incipient indications are that the impact of the frugality drive is assuaging. It should also be noted that growth of visitor arrivals from north of the border, while having decelerated from 20 percent-plus yoy, have steadied and hovered around the mid-teens for the heft of last year, well above the 11-12 percent notched by overall tourist arrivals.
The significance of this cannot be exaggerated. In verity, China is fast becoming a nation of the middle class, whose ranks promise to increase by leaps and bounds in the coming years. Estimated at 300 million currently (already larger than 213 million or so for the United States), it will reach 700 million in times ahead. The so-called generation two Chinese youths now number more than 200 million. Born after the eighties and aged under 30, their salaries are higher than the preceding generation; the same comment applies to their marginal and average propensities to consume. Their keenness to travel abroad for sightseeing and, more importantly, for luxury purchases (jewellery included) seemingly knows no bounds.
Conclusion
As mentioned above, the near-term cyclical importance of the US market can scarcely be rivalled. In the light of an exceptionally uncertain world economic outlook, jewellery practitioners of the Hong Kong special administrative region will, more likely than not, have to hunker down and belt-tighten for some time to come yet. They should hope for the best for sure but also prepare for the worst. As well, they should prepare and equip themselves for the long term. The burgeoning middle class on the mainland, both on the spot (within China) and when they are HK-bound, is too important a source of patronage to be neglected or ignored. (Photo courtesy: Tiancheng International)