Ready for cough medicine for the local economy

February 13 ^th 2001 South China Morning Post

Conventional wisdom says whenever the United States' economy sneezes, the rest of the world - and Hong Kong certainly - catches a cold or worse. Economists may debate whether the United States is entering, technically, a "recession" or a "slowdown". The quibble over semantics cannot disguise the obvious, which is the American boom of the past eight consecutive years has gone out with Bill Clinton.

The vital signs are alarming. American Gross Domestic Product has dropped in the last quarter by an annualized 1.4 per cent in the previous quarter, a weakness not seen in more than five years. Manufacturing, which accounts for 16 per cent of US GDP and 15 per cent of employment, has declined by 2.1 per cent in the fourth quarter compared with the third and the prospects are not looking any brighter.

The statistical gloom is being compounded by a surfeit of bad news from the corporate front. Auto companies are sacking workers by the thousand and the dread word "downsizing" is once again back in the business vocabulary, substituting for "expansion". The banks have tightened lending and the mega-mergers, such as those in media and pharmaceuticals, have practically ceased. Company profits are dismal and the outlook is just as grim. The Information Technology and telecommunication bubbles have burst. The anticipated Christmas 2000 sale fizzled, leaving huge inventories and forcing a price war in unsold electronics, cosmetics and toys, some of which were exported from or through Hong Kong.

The Federal Reserve has responded by lowering the prime rates twice within a month, the first time it has done so in 15 years. The Reserve's Open Market Committee has recently published a very bleak assessment of the economy, saying consumer confidence has eroded, as people become nervous about their jobs and their loans. The last sign is the most worrying because Americans in recent years actually spend more than they save, making theirs a serious debtor nation, despite the prudent finances and surpluses accumulated by the federal government.

What the US prognosis means is that the Hong Kong economy, which expanded statistically by 10.7 per cent last year, will suffer in 2001 and not achieve the 4.1 per cent projected growth rate. The vaunted Hong Kong recovery from the Asian financial crisis, to begin with, was illusory or patchy. Much of the growth over the past year can be attributed to Information Technology and exports - including those to the US. Over the past few months Info-tech has stalled, following the American trend, and exports are not rapidly increasing anymore. Anecdotal evidence shows that many exporters in Hong Kong have had canceled orders from the US, whose spending spree is over. Americans cannot go on sustaining their drastic trade deficit with other countries or continue borrowing to finance their extravagance. The Financial Secretary last week acknowledged that the US rate cut, with Hong Kong following suit, might help the local property market but at the same time hurt exports.

The economic woes in America are bound to affect the European Union. Both the US and the EU not only trade extensively with Hong Kong but also send some of the highest spending tourists to the territory. Hong Kong has in recent years tried to woo more Southeast Asian and mainland visitors to compensate for Japanese tourists who no longer splurge. But so far more tourists from Southeast Asia and the mainland have not been translated into more foreign exchange since these are mainly budget travelers.

The troubles in the US cannot hit Hong Kong at a more delicate time. The government counts on the recovery, real or exaggerated, to fill up its treasury, especially when it once again forecast a major deficit, real or exaggerated. The Financial Secretary, whose budget is due in four weeks, has very few acceptable options. Donald Tsang has already engineered a rise in fees and charges that are much resented by small to medium enterprises, which have not benefited from the "recovery". He may renege on his promise about "no new taxes" but that is politically incendiary and morally indefensible, when companies and their employees are earning less than they did through their mandatory provident fund contributions.

Between now and the budget, the core of which has been written, the Financial Secretary may yet tinker with his spending and revenue plans. If he were to do so, he must re-assess the situation not only locally but also overseas, especially in the US. His past budgets had a wistful or fanciful quality about them because of their gross misreading of trends. Hong Kong public finance can longer be predicated on sloppy economics and unrealistic estimates. The 2001 budget to come maybe his toughest - and last, if he were to be promoted to Chief Secretary - and it will be a measure of his managerial competence and, perhaps, legacy.