•
While lower
crude
prices
may provide
a
welcome tailwind for economic growth, our
analysis suggests it is unlikely to be a game
Ryan Lam, CFA
changer for the Hong Kong economy.
Senior Economist
We
estimate that, all other things being equal, the
[email protected]
USD50 decline in oil prices over the past six
months will boost the city’s GDP growth by
about 0.2 percentage points over 2015.
Sliding Oil Prices and
Its Implications
•
Hong Kong domestic households are estimated
to have spent HKD52.7 billion on oil-related
products last year, implying that lower energy
prices have resulted in a hefty windfall for
households.
•
But there are more important yet often ignored
factors to consider when assessing the impact
of oil prices on growth. First, electricity in Hong
Kong is mainly generated from coal. Second,
the pass-through of changes in crude oil prices
to retail fuel prices is generally less than
perfect. Finally, consumers may save some or
all of the windfall rather than spend it.
•
After taking necessary adjustments and secondround confidence effects into consideration, our
view is that the sharp decline in oil prices will
boost GDP by about 0.2% via expanding
domestic demand.
•
Our analysis suggests that the Hong Kong
economy will receive minor support from the
trade channel since the city’s export markets
are diversified to oil exporters, which are
suffering terms-of-trade losses.
•
The dip in global crude oil prices that has
occurred over recent months, by itself, would
January 2015
reduce 2015 full-year inflation by a percentage
point. We continue to expect headline inflation
to ease notably this year, declining from an
estimated 4.4% in 2014 to 3.5% in 2015.
Living with cheaper oil
Policymakers in many Asian countries may be feeling a sense of relief over the
current downtrend in crude oil product prices. Falls in the oil price on the scale
experienced over the past six months are rare. From a high point in June last
year, the price of both West Texas Intermediate (WTI) and Brent crude oil
plunged more than 50%. Crude oil is currently trading at around USD50 per
barrel, a level not seen since 2009 in the aftermath of the global financial crisis
(Exhibit 1).
Exhibit 1: Crude Oil Price (USD per barrel)
Exhibit 2: Purchasing Managers’ Indices
(Quarterly average)
Source: CEIC, Hang Seng Bank
Source: Markit, HSBC, Hang Seng Bank
However, unlike previous episodes of oil price weakness, which were generally
associated with adverse demand conditions, the primary catalyst for the current
sell-off has been developments on the supply side. There is no doubt that global
growth remained lacklustre in 2014, but the world’s economy appeared to be
stabilising in the second half of the year (Exhibit 2). Crude oil prices peaked in
mid-June 2014, a week after ISIS militants captured Mosul and were threatening
key Iraqi oil infrastructure. The decline gained speed after OPEC, which has
historically cut production to arrest sliding prices, chose to maintain its quota level
in November. This decision signals a continuation of a supply-demand imbalance
into 2015 and possibly beyond. So, if we are facing a supply-side shock that
would send oil prices down further than is warranted by a mild global slowdown,
what are the potential implications for the Hong Kong economy?
January 2015
2
How concerned should we be?
The traditional rule of thumb for assessing the impact of crude oil shocks is that
for each 10% decline in oil prices, growth increases by 0.1 to 0.2 percentage
points.
However, these estimates are largely the result of model-based
simulations and should be treated with caution. One limitation of these model
simulations is that they heavily rely on historical average elasticity. In practice,
the economic factors involved vary considerably over time.
With reduced oil
intensity and improved energy efficiency, the evidence supporting an adverse
shock on oil supply today is less compelling than in the past.
We believe the decline in commodity prices is unlikely to be a game changer for
the Hong Kong economy.
Though lower crude oil prices would provide a
welcome tailwind for growth, our analysis suggests its impact on the Hong Kong
economy should not be overestimated.
The USD50 decline in oil prices
experienced over the past six months will boost the city’s GDP growth by about
0.2 percentage points, according to our estimates. As we explain below, the
positive effect on consumer spending probably represents the most important
boost to the economy from lower energy prices. Its estimated effect on exports,
on a net basis, is supportive but negligible.
Consumers to enjoy disposable income windfall
An oil price shock affects macroeconomic performance via various channels. For
domestic demand, we see the correction in oil prices as having two main effects:
1) a positive effect on private consumption, and 2) an adverse impact on oilrelated investment.
Given Hong Kong’s relative scarcity of economically
significant natural resources, oil-related capital outlays are of almost negligible
importance for the economy. Our primary area of interest, therefore, is the likely
impact on private consumption.
The best available proxy for consumer spending on oil-related products is
household expenditure on fuel and transport. According to the latest Household
Expenditure Survey, Hong Kong households spent HKD44.7 billion on oil-related
products including electricity and transport in 2009/10. Although no information is
January 2015
3
Xxxxxx
available from 2010 onwards, we have used sub-component CPI indices to
extrapolate oil-related spending through to 2014. The results are shown in Exhibit
3.
Consumer spending on oil-related products is estimated to have reached
HKD52.7 billion in 2014. A simple calculation suggests the recent decline in oil
prices will provide a windfall of roughly HKD27 billion in discretionary income for
Hong Kong households.
Taken alone, this windfall should contribute 1.2
percentage points to GDP growth.
Exhibit 3: Annual Household Expenditure
(HKD million)
Exhibit 4: Electricity Production
(by source, % of total electricity production)
Source: Census & Statistics Department of HKSAR, Hang Seng
Bank
Source: World Bank, Environmental Protection Department of
HKSAR, Hang Seng Bank
Three crucial caveats need to be kept in mind with regard to this simple
framework, however.
This estimation is likely to overstate the impact on
economic growth since 1) electricity generated in Hong Kong comes mainly from
coal (Exhibit 4), 2) the pass-through of changes in crude oil prices to retail fuel
prices is generally less than perfect, and 3) consumers may save some or all of
the windfall rather than spend it.
Given these realities, it is necessary to consider some factors that are ignored by
the above estimation. We have made the following adjustments in our analysis:
•
A reduction of the impact on household expenditure related to electricity
usage, reflecting the fact that only 0.3% of electricity consumed in Hong Kong
is generated from oil sources.
January 2015
4
Xxxxx
•
We estimated the elasticity between Brent oil prices and domestic retail fuel
prices by conducting regression analysis. Based on our analysis and with all
other things remaining constant, a 1% drop in Brent oil prices depresses retail
fuel prices by 0.3%.
•
Our consumption model presumes that about 55% of the windfall income will
be spent over the next four quarters.
Exhibit 5: Positive Impacts on Private Consumption
Adjusted household expenditure for oil-related products
HKD42.3 billion
Change in oil prices
-50%
Pass-through to retail fuel prices
30%
Short-run propensity to consume out of income
55%
Estimated impact on consumption
↑HKD3.5 billion
(0.16% of GDP)
Source: Census & Statistics Department of HKSAR, Hang Seng Bank
We estimate the decline in oil prices that has occurred in recent months should
directly boost private consumption about HKD3.5 billion. However, there is one
other important point to take into consideration. A 2014 study by the IMF1 reveals
that the second-round confidence effects could be as large as the direct effect.
Using our in-house general equilibrium model, we estimated the impact of the
confidence effects by increasing long-term income growth by 0.15 percentage
points. After allowing for second-round effects, the fall in oil prices should boost
Hong Kong’s GDP growth by around 0.2 percentage points.
Negligible impact on exports
Another important transmission channel could be the impact on external trade. In
principle, a drop in the oil price should have little effect on the global economy. If
the same volume of oil is being produced and consumed, reduced oil prices
simply reflect a transfer of income from oil producers to oil consumers. It benefits
oil importers at the expense of oil exporters through the terms of trade effects on
1
Legacies, Clouds, Uncertainties, IMF World Economic Outlook, October 2014
January 2015
5
real incomes, but has negligible implications for global output. In reality, it is not
necessarily a zero-sum game.
Oil-exporting countries tend to save a larger
proportion of their income than oil-importing countries. One of the implications of
this is that a transfer of income from oil producers to oil consumers should lead to
higher global demand.
Hong Kong is a net importer of oil. However, given that its exports head to a
broad sweep of countries – including both oil exporters and oil importers (Exhibit
6) – the impact of oil shocks are not unambiguously positive for the city. In fact,
lower oil prices are potentially a double-edged sword for international trading hubs
like Hong Kong.
Typical macro models, however, fail to capture the
idiosyncracies of individual trading partners. We have chosen to approach this
issue by assuming that oil demand from our trading partners is unresponsive to
lower oil prices in the short run. As such, the change in the external oil balance in
percent of GDP is equal to the growth impact.
Exhibit 6: External Oil Balance (% of GDP)
Exhibit 7: Growth Impacts from Lower Oil Prices
(% of GDP)
Source: United Nations, Hang Seng Bank
Source: United Nations, Hang Seng Bank
For most of these countries, if oil prices remain at USD50 per barrel through
2015, growth rates will deviate -0.5 to 0.5 percentage points from the baseline
(Exhibit 7). These estimates are comparable to the simulation result generated
by the OECD’s Interlink Model2. We also calculated the aggregate impact on
Hong Kong export growth, in which contribution from each economy is weighted
according to its share of Hong Kong’s total exports.
2
Standard Shocks in the OECD Interlink Model, OECD Economics Department Working Papers No. 306, September 2001
January 2015
6
On a trade-weighted basis, our estimate indicates that the Hong Kong economy
should receive a minor boost from the trade channel – a rise in GDP growth of
just less than 0.1 percentage point. One explanation for this is that the city’s
export markets are diversified to oil exporters as well. Another reason is that the
US ‘shale revolution’, which has greatly reduced its demand for imported oil, has
altered its GDP sensitivity to global oil price swings. All in all, we believe the
continued weakness in oil prices is not likely to provide a significant cushion to the
external trade.
Disinflationary pressure is building up
While the growth effect will still take time to play out, the sudden slide in oil prices
has already begun cutting into inflation rates in much of the world.
Looking
individually at the components of the CPI, oil-related products account for 7.6% of
Hong Kong’s CPI basket (Exhibit 8). The key swing factor will be to what extent
oil price variation is passed through to consumers versus refiners and retail
market operators absorbing crude oil price changes into their profit margins.
Exhibit 8: CPI Weights of Oil-related Products (%)
Exhibit 9: Price of Oil-related Products
(% year on year)
Source: Census & Statistics Department of HKSAR, Hang Seng
Bank
Source: Census & Statistics Department of HKSAR,
Hang Seng Bank
With a diverse set of pricing mechanisms, a distinction must be made between
the relative sensitivity of different oil-related products within the CPI basket.
Prices of towngas, LPG and motor fuels are highly sensitive to oil price
movement, but public transport fares are far less sensitive (Exhibit 9).
January 2015
7
Drawing lessons from the sharp sell-off in commodities during 2009, we have
assumed a 40% transmission in international oil price movements to Hong Kong’s
towngas, LPG and motor fuel prices, a 10% transmission to electricity tariffs, and
a 5% transmission to public transport fares. Under this setting, the dip in global
crude oil prices that has occurred over recent months would, by itself, reduce
2015 full-year inflation by a percentage point. Since the current weakness in
crude oil products was already factored into our baseline projections, we see no
need to revise our inflation forecast. We continue to expect headline inflation to
ease notably this year, declining from an estimated 4.4% in 2014 to 3.5% in 2015.
January 2015
8
Hong Kong Economic Monthly Statistics
GDP
HKD bn
2006
2007
2008
2009
2010
2011
2012
2013
2014F
2015F
Q1 2013
Q2
Q3
Q4
Q1 2014
Q2
Q3
Jan 2013
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 2014
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
YTD
1,503
1,651
1,707
1,659
1,776
1,934
2,037
2,125
2,227
2,345
507
491
548
580
531
517
576
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1,625
Real growth
yoy (%)
7.0
6.5
2.1
-2.5
6.8
4.8
1.5
2.9
2.1
2.6
2.9
3.0
3.0
2.9
2.6
1.8
2.7
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2.4
Total Deposits
2006
2007
2008
2009
2010
2011
2012
2013
2014F
2015F
Q1 2013
Q2
Q3
Q4
Q1 2014
Q2
Q3
Jan 2013
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 2014
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
YTD
HKD bn
4,757
5,869
6,060
6,381
6,862
7,591
8,297
9,180
10,189
11,364
8,353
8,481
8,906
9,180
9,189
9,612
9,920
8,535
8,436
8,353
8,475
8,577
8,481
8,607
8,652
8,906
8,973
9,065
9,180
9,184
9,330
9,189
9,392
9,522
9,612
9,848
9,855
9,920
10,037
10,075
10,075
yoy (%)
17.0
23.4
3.2
5.3
7.5
10.6
9.3
10.7
10.0
11.0
8.9
10.1
12.2
10.7
10.0
13.3
11.4
11.2
9.0
8.9
9.4
12.8
10.1
10.8
10.3
12.2
10.9
11.2
10.7
7.6
10.6
10.0
10.8
11.0
13.3
14.4
13.9
11.4
11.9
11.1
11.1
Retail
sales
(value)
Retail
sales
(volume)
yoy (%)
yoy (%)
7.2
12.8
10.6
0.6
18.3
24.8
9.8
11.0
1.0
6.0
13.9
16.1
7.5
6.8
4.2
-7.0
1.6
10.5
22.7
9.8
20.7
12.9
14.7
9.3
8.1
5.0
6.3
8.5
5.7
14.4
-2.2
-1.5
-9.9
-3.9
-6.9
-3.2
3.5
4.8
1.4
4.1
0.2
5.7
10.1
5.0
-0.8
15.5
18.4
7.2
10.8
1.0
5.0
14.1
15.0
6.9
7.0
4.0
-7.2
1.6
10.4
21.9
10.1
19.4
12.2
13.3
8.7
7.2
4.9
5.8
9.1
6.1
16.7
-2.2
-2.5
-9.6
-4.6
-7.5
-4.6
2.8
6.6
4.3
7.5
0.8
RMB Deposits
RMB bn
23
33
56
63
315
589
603
860
N/A
N/A
668
698
730
860
945
926
944
624
651
668
677
698
698
695
709
730
782
827
860
893
920
945
960
956
926
937
937
944
944
974
974
yoy (%)
3.6
42.7
67.8
11.9
402.2
86.9
2.5
42.7
N/A
N/A
20.5
25.1
33.8
42.7
41.4
32.7
29.4
8.3
15.1
20.5
22.6
26.1
25.1
23.4
28.5
33.8
40.9
44.8
42.7
43.2
41.2
41.4
41.8
36.8
32.7
34.8
32.0
29.4
20.7
17.8
17.8
January 2015
Foreign Trade
Exports
HKD bn
yoy (%)
2,461
2,688
2,824
2,469
3,031
3,341
3,434
3,562
3,704
3,890
813
859
931
960
818
901
985
305
216
292
290
292
278
305
307
318
323
326
311
303
213
302
286
306
309
326
327
332
332
327
3,363
9.4
9.2
5.1
-12.6
22.8
10.1
2.9
3.6
4.0
5.0
3.9
2.4
3.3
4.8
0.7
4.8
5.9
17.6
-16.9
11.2
9.0
-1.0
-0.2
10.6
-1.3
1.5
8.8
5.8
0.0
-0.4
-1.3
3.4
-1.6
4.9
11.4
6.8
6.4
4.5
2.7
0.4
3.4
Total Loans
HKD bn
2,468
2,962
3,284
3,289
4,227
5,081
5,569
6,457
7,168
8,033
5,738
6,096
6,399
6,457
6,826
7,074
7,210
5,685
5,671
5,736
5,804
5,903
6,096
6,181
6,263
6,399
6,406
6,460
6,457
6,697
6,908
6,826
6,852
6,966
7,074
7,141
7,142
7,210
7,282
7,287
7,287
Trade
balance
Imports
yoy (%)
6.7
20.0
10.9
0.1
28.6
20.2
9.6
16.0
11.0
12.0
10.4
14.6
18.1
16.0
19.0
16.0
12.7
11.1
10.1
10.4
10.7
12.3
14.6
15.1
16.9
18.1
17.8
17.7
16.0
17.8
21.8
19.0
18.1
18.0
16.0
15.5
14.0
12.7
13.7
12.8
12.8
HKD bn
2,600
2,868
3,025
2,692
3,365
3,767
3,912
4,065
4,248
4,503
923
996
1,049
1,097
942
1,042
1,109
332
250
341
333
336
327
343
347
360
361
370
365
323
267
352
341
348
352
368
359
382
382
379
3,853
Money
supply
(Total M3)
yoy (%)
15.5
20.6
2.6
5.2
8.0
12.9
11.0
12.4
12.5
12.0
9.6
10.9
13.4
12.3
12.1
15.0
12.2
12.4
9.7
9.6
10.3
13.4
10.9
11.6
11.3
13.4
12.4
12.6
12.3
9.6
12.8
12.1
12.5
12.6
15.0
15.9
15.2
12.2
12.1
11.2
11.2
yoy (%)
11.6
10.3
5.5
-11.0
25.0
11.9
3.9
3.8
4.5
6.0
4.9
3.5
2.7
4.4
2.1
4.6
5.7
23.9
-18.3
11.3
7.7
1.7
1.4
8.3
-0.2
0.4
6.3
5.2
1.8
-2.7
6.8
3.2
2.4
3.7
7.6
7.5
3.4
6.3
5.6
2.4
4.2
Residential
Property
Price Index
ytd (%)
4.1
25.7
-11.1
28.5
21.0
11.1
25.7
7.7
0.0
-4.0
5.4
6.9
7.9
7.7
-0.6
2.1
8.6
2.2
5.4
5.4
5.2
5.8
6.9
7.7
8.2
7.9
7.8
7.6
7.7
-0.2
-0.3
-0.6
0.0
0.9
2.1
4.6
6.6
8.6
10.2
N/A
10.2
Unemployment
rate (s.a.)
Consumer
prices
%
yoy (%)
HKD bn
-138.8
-180.5
-201.1
-223.3
-333.8
-426.4
-477.8
-502.9
-543.4
-613.1
-110.6
-136.6
-118.7
-137.0
-124.0
-140.7
-124.0
-27.5
-34.0
-49.2
-42.7
-44.3
-49.7
-37.2
-39.6
-42.0
-38.1
-44.6
-54.4
-20.0
-53.7
-50.4
-55.3
-42.4
-43.1
-42.1
-31.5
-50.4
-49.8
-52.2
-490.8
4.8
4.0
3.5
5.2
4.3
3.4
3.3
3.3
3.3
3.5
3.5
3.3
3.3
3.2
3.1
3.2
3.3
3.4
3.4
3.5
3.5
3.4
3.3
3.3
3.3
3.3
3.3
3.3
3.2
3.1
3.1
3.1
3.1
3.1
3.2
3.3
3.3
3.3
3.3
3.3
3.3
Office Rental
Index
ytd (%)
15.0
14.6
9.2
-9.8
12.5
15.5
7.7
7.1
0.0
-4.0
3.0
6.0
7.5
7.6
0.9
2.1
3.7
0.4
1.7
3.0
4.5
4.9
6.0
6.7
8.0
7.5
7.1
7.7
7.6
-0.2
0.4
1.0
1.3
1.9
2.2
3.0
3.4
3.7
3.7
N/A
3.7
2.0
2.0
4.3
0.5
2.4
5.3
4.1
4.3
4.4
3.5
3.7
4.0
5.3
4.3
4.1
3.7
4.8
3.0
4.4
3.6
4.0
3.9
4.1
6.9
4.5
4.6
4.3
4.3
4.3
4.6
3.9
3.9
3.7
3.7
3.6
4.0
3.9
6.6
5.2
5.1
4.4
Tourist Arrivals
'000
25,251
28,169
29,500
29,590
36,030
41,921
48,615
54,299
61,358
66,880
12,742
12,624
14,499
14,434
14,698
13,831
16,130
4,633
4,022
4,087
4,280
4,142
4,201
4,832
5,358
4,309
4,632
4,580
5,222
5,455
4,417
4,825
4,748
4,591
4,493
5,374
6,010
4,747
5,214
5,300
55,172
yoy (%)
8.1
11.6
4.7
0.3
21.8
16.4
16.0
11.7
13.0
9.0
13.5
13.7
11.1
9.0
15.3
9.6
11.2
11.9
19.3
10.2
11.5
13.8
16.0
10.6
9.4
13.9
9.1
8.6
9.3
17.8
9.8
18.1
10.9
10.8
6.9
11.2
12.2
10.2
12.6
15.7
12.4
Note: (F) Forecast
Source: Census and Statistics Department of HKSAR, Hong Kong Monetary Authority , Rating and Valuation Department, Hong Kong Tourism Board, CEIC, Hang Seng Bank
Note: (F) Forecast
Source: Census and Statistics Department of HKSAR, Hong Kong Monetary Authority , Rating and Valuation
Department, Hong Kong Tourism Board, CEIC, Hang Seng Bank
January 2015
9
Hong Kong Retail Sales Volume
Source: CEIC, Hang Seng Bank
Hong Kong Exports Volume
Source: CEIC, Hang Seng Bank
Hong Kong CPI Inflation
Source: CEIC, Hang Seng Bank
January 2015
Hong Kong Unemployment Rate
Source: CEIC, Hang Seng Bank
Hong Kong Total Loans and Deposits
Source: CEIC, Hang Seng Bank
Hong Kong Property Prices
(overall index, 1999 = 100)
Source: CEIC, Hang Seng Bank
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sources believed to be reliable and the opinions contained herein are for reference only and may not
necessarily represent the view of HASE. The research analyst(s) who prepared this report certifies(y) that the
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January 2015
11