Why analysts are cautious on Hong Kong's consumer outlook

Here are 3 compelling reasons.

According to Hang Seng Bank's HK economic monitor, a number of factors also add to the uncertainty about the outlook for consumption and thus suggest that we should stay cautious on the consumer outlook.

Here's more:

Gains in real income, by 1% in the first half of 2013, have been less spectacular than the pace of job creation. One reason for this may be a corresponding slowing in labour productivity growth, much of which may be structural due to faster expansion of low value-added sector.

Households can always rely on consumer credits and financial wealth to smooth their consumption if they are confident about future income prospects. But taking a closer look at consumption, it appears that individuals are still hesitant to spend.

Sales growth in the highly discretionary category of consumer durable goods decelerated even faster than real earnings growth, falling 0.4% and 0.8% in Q2 and Q3 respectively (Exhibit 15). Worries about the future continue to weigh on local consumers.

The positive wealth effect related to rising house prices, which boosted consumption over the past few years, should dissipate. The question now is how a potential correction in the property market will impact the local economy. The impact to household spending from net housing wealth could be calculated by multiplying the elasticity estimate to the corresponding growth rate.

Depending on model specifications, the estimates of the elasticity of consumer spending to housing wealth range from 0.03 to 0.18 (HKMA 2007; ECB 2009). If we assume a 5-10% decline in housing wealth in a year, the adverse wealth effect on consumerspending should range between 0.2 percentage point and 1.8 percentage points.