Hong Kong retail sales supported by pent-up demand, but unemployment and tourism remain problematic

• With stabilized Covid-19 cases, Hong Kong retail sales are slowly recovering from the historic dip. Shoppers are now back to the high street, unleashing the pent-up consumption demand after months of suppression. In this note, we provide an update on Hong Kong retail sales and the ongoing challenges.
• Hong Kong‘s gradual relaxation of social distancing measures is helpful for consumption, but its retail sales are indeed heavily dependent on sentiment and tourism. In particular, self-restrain behaviors seems to be more important for spending patterns than government measures to restrain mobility. Compared to January 2020, the voluntary social distancing measures are responsible for 25% reduction in mobility while government restrictions have only worsened it by another 5%. As such, the relaxation of government measures will have limited impact on domestic consumption while sentiment remains key.
• Thus, the recent improvement can be explained by pent-up demand by domestic consumers and the heavy discounts from retailers. In that regard, the improved spending may be temporary if the unemployment continues to surge. We expect the jobless rate to climb from 5.9% in April 2020 to as high as 6.3% in Q3 2020. While fiscal policies may be helpful, the impact from the HKD 10,000 handout per resident on retail sales may be exaggerated. Even though the total amount is equivalent to 16% of retail sales, the money may not be fully used for purchases immediately. The applications for wage subsidies are also lower than government’s expectation, and therefore the support may be meager.
• From a structural point of view, the heavy reliance on tourism also means it is difficult for local demand to fully substitute foreign spending. Hong Kong retail sales have a strong correlation of 0.9 with tourist arrivals, ranking the highest in Asia. The linkage is the highest for jewelry, cosmetics, clothing, medicines and, more generally, consumer durable. Unless there is a feasible solution in setting up travel bubbles, retail sales may head south again after the suppressed domestic demand is covered, especially if the labor market remains poor.
• The weak retail sales have also further infiltrated into the property market. Rents for retail properties fell 7.1% YoY in March 2020, the largest decline since June 2009. With more shop closures, the vacancy rate climbed from 10.9% in 2019 to 11.4% in March 2020. This trend is expected to worsen further at least until Q3 2020.
• All in all, Hong Kong retail sales are heading towards a 20% full-year decline in 2020. The upcoming cyclical rebound might be short-lived as there are clear headwinds both from the labor market and the dependence on tourism for retailers.

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