Economic Analysis August, 2004
A Publication of the BEA Economic Research Department
Employment Growth: Analyzing the Internal and External Factors
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After a brief contraction in Q2 2003, Hong Kong’s economy has resumed its growth
momentum. More
encouragingly, improving economic conditions have pulled the sluggish job market
out of its slump.
The unemployment rate has dropped from 8.7% in July 2003 to 6.9% in June this
year. In the past,
both internal and external forces worked together to drive employment growth.
Yet this time, external
factors have supplied much of the fuel to power the job market’s upturn.
Item List
Here is the following items will be discussed:
- Identifying the sources of employment growth
- Surging exports
- Vibrant tourism
- Rising demand for business services
- Shortage of construction projects
- Persistent budget deficit
- Conclusion
Identifying the
sources of employment growth
Between Q3 2003 and Q1 2004, external forces directed the job creation process.
Specifically, the
import/export trades, wholesale/retail and restaurants/hotels all recorded
strong employment growth.
Employment in real estate and business services rose modestly. On the other
hand, employment
failed to pick up in construction, as well as public administration, education,
medical, and other health
and welfare services.
Surging exports
The trade sector has been an important job creator in the current recovery. The
sector has always
been a major contributor to the job market, even before its recent stellar
performance. Yet from 2002
to the first half of 2003, employment growth stagnated despite strong export
growth.
There are two possible explanations for this phenomenon. Part of the increase
in trade activities in the
past few years was driven by foreign companies relocating their manufacturing
processes to China. As
a result, an increasing share of trade involved the transportation of
semi-finished products, such as
computer motherboards and electronic components, from parent companies overseas
to Mainland
assembly lines. Significantly fewer economic activities took place in Hong Kong,
compared to the
traditional trade in re-exports. Furthermore, trading companies were still
recovering from the aftermath
of the Asian Financial Crisis, with many saddled with negative equity. The
uncertain global economic
outlook and the SARS outbreak compromised their willingness to expand their
workforce. As a result
of all these factors, the pickup in trade activities failed to stimulate
employment.
Compared to the situation in 2002, the latest increase in exports has boosted
employment significantly,
as traditional trading activities have surged following the recent recovery in
the re-export trade to the
US and other regions. Moreover, rising property prices have improved trading
companies’ financial
position, and the recovery in the global economy has reaffirmed the pickup in
trade activities. Total
exports jumped by 15.5% in the first half over the same period last year. As the
worrying factors are
gradually turning into distant memories, the trade sector is expected to become
a major driving force in
Hong Kong’s job market once again.
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Vibrant tourism
Another bright spot is the rise in employment in domestic consumption market, in
which surging tourist
arrivals have played an important role. The introduction of the Individual
Visiting Scheme (IVS) at the
end of July 2003 has spurred mainland tourist arrivals. In addition, tourists
from other countries have
started to return after the end of the SARS outbreak. In the first quarter this
year, total consumption
expenditure in the domestic market grew by $7.5 billion compared to the same
period last year, and
tourist spending accounted for 36% of the increase. Since tourists spent a large
portion of their travel
budgets on shopping, meals, and hotels, these industries have benefited the most
from the surge in
tourist arrivals. From 3Q 2003 to 1Q 2004, 20,000 new jobs were created in these
sectors.
Vibrant tourism will continue to provide a strong lift to employment this
year. The recent expansion of
IVS to nine more cities outside Guangdong effectively bolsters the number of
eligible mainland visitors
to 150 million. Non-mainland tourists are expected to increase as the global
economy continues its
steady growth. We estimate that total tourist arrivals will grow by 38% to 21
million this year, and will
help generate 11,400 jobs in the retail, restaurant, and hotel industries in
2004.
The pace of visitor arrivals will slow down next year when the SARS-induced
low-base effect
disappears. Nevertheless, the scheduled opening of the Disney Theme Park in 2006
will turn Hong
Kong into a major tourist site once again. Overall, we expect tourism to create
7,500 jobs in 2005 and
11,500 in 2006 in the retail, restaurant, and hotel industries.
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Rising demand for business
services
The real estate and business services sector was another strong performer during
the recent revival in
the job market. Similar to the trade sector, the business services industry has
always been a steady
job creator under the benefit of the growing China market. Between 1998 and
2000, employment in
real estate and business services continued to grow despite the sluggish local
property market.
However, growth has stagnated since then. Advances in the mainland’s
infrastructure and cost-cutting
practices within the sector triggered the relocation of back-end jobs, such as
data processing and call
centers, to the north. Employment growth within the sector languished as a
result.
However, employment in real estate and business services returned to a rising
trend between Q3 2003
and Q1 2004, adding 8,600 jobs. While the upturn was reinforced by the revival
in the local property
market, it was also affected by the end of the current cycle of corporate
restructuring. China’s gradual
march to a service-based economy will generate huge demand for business
services, and the superior
experience and expertise of Hong Kong-based professionals will ensure them a
share of this lucrative
market. This will continue to benefit employment growth in the sector.
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Shortage of construction
projects
While external factors provided a much-needed boost to overall employment, the
internal sector has
lagged behind in the job creation process. The 1997 Asian Financial Crisis and
the subsequent crash
in property prices weakened the outlook for the property market, forcing
developers to reduce the
number of construction projects on both the commercial and residential fronts.
As a result, the total
number of completed office, commercial, and factory space fell from 975,000 sq.m
in 1998 to an
estimated 377,000 sq.m. in 2004, while the number of completed private and
public housing units
decreased from 49,000 to an estimated 26,400 during the same period.
The construction industry lost 5,100 jobs between Q3 2003 and Q1 2004 and has
been downsizing
since 1997. Worse still, the sector has little chance to reverse its fortunes in
the near future. The lack
of construction projects has forced developers to trim their workforce. The
latest forecast issued by the
Housing, Planning and Lands Bureau indicates that new supply of private
residential units will drop
over the next four years to an estimated 16,200 in 2007 and 11,400 in 2008.
Furthermore, KCRC will
not invite expression of interests for their residential development projects
before 2005, and MTRCL
will not provide new residential flats in the coming three years except those
already under construction,
thus extending the hiring drought.
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Persistent budget deficit
The sluggish process of job creation in the internal sector is heightened by the
reduced hiring in the
public sector. During the difficult years immediately following the Asian
Financial Crisis, public sector
hiring gave much support to the labor market. Yet, between Q3 2003 and Q1 2004,
the year-on-year
growth of employment in public administration as well as education, medical, and
other health and
welfare services has turned negative.
Unlike the private sector, which looks set to benefit from better economic
conditions, the public sector
will continue to be constrained by the government’s tight financial position.
Finance Secretary Henry
Tang stated in The 2004-05 Budget that the government will experience a fiscal
budget deficit of HKD
49 billion in F2004/05, equivalent to 4% of GDP, and the fiscal balance sheet is
not expected to return
to the black before F2008/09. To restore fiscal balance, the government declared
that it will cut the
establishment to 160,000 by F2006/07. This leaves the public sector little room
to create new jobs in
the near future.
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Conclusion
The recent revival in employment has been largely driven by vibrant tourism,
rising trade activities, and
strong demand for business services. Private consumption is expected to pick up
on the back of
gradually improving consumer confidence. This, together with strong tourism
growth, will help sustain
employment growth in the retail and restaurant industries. The improving global
economic
environment will provide further stimulus to Hong Kong’s trade sector and
business services industry.
The trade sector is likely to be shielded from the negative effects of Beijing’s
macro measures to cool
the Chinese economy, as most of the goods exported from Hong Kong to China are
for outward
processing. The pace of improvement in the unemployment rate situation will be
moderated by the
weariness of the construction industry and downsizing in the public sector.
Nevertheless, the positive
will outweigh the negative, and unemployment rate is expected to fall to 6-6.5%
by year-end, and could
reach 5.5% by 2005. Real GDP is projected to grow by 7.0% in 2004.
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