HKTDC Export Index 2Q20: Exporters Pessimistic as Covid-19 Outbreak Persists

• The HKTDC Export Index moved up by a marginal 2.2 points (from its record-low of 16.0 in the previous quarter) to 18.2 in 2Q20. As it, however, stayed deep in contractionary territory, this can be taken as a clear indication that Hong Kong’s export prospects are not likely to improve dramatically in the short-term.

• Overall, however, exporter confidence did rally slightly in certain industry sectors. Most notably, machinery (at 21.0) and electronics (18.7) continued to marginally out-perform the overall average.

• In general, though, it’s fair to say exporters remained cautious with regard to the near-term prospects in many of Hong Kong’s major markets. At 46.5, Japan continued to be seen as the most promising market, while, at 35.0, the EU was again rated as inspiring the least confidence.

• In line with the subdued export prospects, procurement sentiment hit a record-low of 10.5. Despite this, both the Employment Index and the Trade Value Index notched up slight increases (42.1 and 30.8 respectively).

• With regards to the continuing Covid-19 crisis, some 97.5% of exporters conceded that the pandemic had adversely impacted their businesses, an increase of 3.6 percentage points on 1Q20.

• The most severe impact reported was buyers purchasing less since the beginning of the Covid-19 outbreak. Many respondents also reported delays in product deliveries and logistical disruptions.

• In response to the pandemic, 67.6% of respondents reported they had implemented remote working arrangements, while 41.7% had also looked to online channels as a means of supplementing their conventional sales initiatives.

• The latest survey also indicated that Hong Kong exporters had again become cautious with regard to China-US trade tensions. In total, 69.8% of respondents were concerned the dispute would damage their export prospects, an increase of 20 percentage points on the corresponding figure for 1Q20.

• Despite such concerns, 64.6% of respondents maintained that uncertainty over when and if the coronavirus outbreak would be contained remained their biggest concern, followed by declining global demand (19.5%), while 10.8% singled out China-US trade tensions as a particular worry.

With economies the world over hard hit by the Covid-19 outbreak, global trade has, understandably, deteriorated sharply. As businesses and whole countries around the world have been subject to stringent lockdowns, demand has tumbled across a range of sectors, sending trade figures into freefall. Against such a backdrop then, the HKTDC Export Index actually showed a marginal improvement, rallying to 18.2, 2.2 points above the all-time low of 16 recorded for the previous quarter. Although this may indicate that any negative sentiment on the part of respondents is now plateauing, the fact that the overall Index remains well into contractionary territory can be taken as confirmation that Hong Kong’s export outlook is likely to remain subdued over the near term at the very least.

In a slightly more hopeful development, exporter confidence improved – albeit mildly – in a small number of industry sectors. Most notably, machinery and electronics continued to outperform the overall average, with their readings rising to 21 (up 4.6) and 18.7 (up 2.4) respectively in the most recent quarter. Sentiment among toy exporters also improved, rising to 17.6 (up 2.7), while jewellery enjoyed the biggest rise of any sector, adding 6.7 points to reach a total of 14.7, a distinct improvement on its record-low of 8 in 1Q20. It should be noted, however, that both toys and jewellery remained below the overall average (18.2). Faring still less well, timepieces and clothing showed further decline this quarter, falling to 13.0 (down 0.9) and 12.6 (down 1.6) respectively, a clear indication that their export levels are likely to remain subdued over the near term.

Turning to the performance of individual markets, Hong Kong exporters remained largely cautious about the near-term prospects in pretty much all of them. At 46.5 (up 1.7), Japan continued to be seen as the most promising of all the key markets, while the US stayed in second place at 39.3 (down 0.7), followed by mainland China at 39.0 (up 2.0). The least appealing market accolade, however, was handed, yet again, to the EU, even though its rating of 35.0 this time around actually represented a 1.0 point improvement.

In line with their expectation of a poor export performance over the near term, many respondents similarly lacked confidence in the imminent prospects for offshore trade (i.e. those shipments not passing through Hong Kong but handled by Hong Kong exporters). This conviction was reflected in the 2Q20 Offshore Trade Index, which declined 2.0 points, falling to a record-low of 10.3.

Over the same period, though, the Trade Value Index actually edged up by a very small degree – 0.2 points – to 30.8. This, however, still indicates that the unit price of export goods will remain under downward pressure in the short term. Within this sub-index, electronics (at 31.6 – up 0.9 points) looks tipped to moderately out-perform other industry sectors in this regard. Less reassuringly machinery (29.9), toys (27.1) and clothing (24.8) all fell by between 3.1 and 5.5 points, leaving them just marginally above their lowest-ever readings. At the foot of the table, meanwhile, jewellery (22.5) maintained its all-time low and timepieces (22.1) fell by 5.3 to its worst recorded level.

Turning to the Procurement Index, this, too, suffered a further decline, failing by 4.3 points to a record-low of 10.5. At 17.3, timepieces remained the best performer in this sub-index, with all the other major industry sectors dropping further into contractionary territory and recording all-time lows – machinery (14.8), toys (11.3), electronics (10.4) and clothing (9.4). In the case of the jewellery sector, sentiment here dropped to 2.0 from 4.0 in 1Q20, which was itself a massive 19.5 points drop when compared to 4Q19.

On a relatively rare positive note, the Employment Index edged up by 1.9 points (to 42.1) in 2Q20, suggesting that recruitment in many of the export-related sectors will at least remain at a stable level for the foreseeable future. Of the key industries, machinery recorded the most substantial increase (up 4.3 points to 43.2), followed by electronics (up 1.7 points to 42.6). While toys (40.8), jewellery (36.3) and clothing (36.1) all rallied by between 0.3 and 4.0 points, timepieces – despite a quarter-on-quarter uptick of 3.9 points – remained the poorest performer overall, suggesting the distinct likelihood of staff shrinkage within the sector.

Inevitably, the ongoing coronavirus outbreak has had a negative impact on nearly every exporter. Unsurprisingly, 97.5% of respondents maintained their export levels would have been higher if not for the pandemic, an increase of 3.6 percentage points on those expressing the same sentiment in 1Q20. Accordingly, only 2.5% of survey participants indicated they had not suffered on account of the virus, down from 6.1% in the previous quarter.

Among those that had been affected, 57% reported that buyers had been purchasing less since the outbreak began, while more than half (52.3%) had orders cancelled. Among the other coronavirus-related disruptions cited were postponed shipments (55.8%) and distribution problems (53.1%). At the extreme end of the spectrum, some 47.5% reported they had been obliged to close factories / offices in order to comply with mandatory quarantine / lockdown requirements.

In terms of their response to the coronavirus outbreak, just over two-thirds (67.6%) of exporters reported they had implemented working-from-home arrangements. In addition, some 41.7% had looked to online sales channels as means to supplement their conventional sales operations. Among the other short-term solutions adopted by survey participants were lowering unit prices (27.5%) and developing product categories seen as likely to be in particular demand (25.2%). At this stage, however, there has been little evidence that many Hong Kong exporters have proactively considered long-term diversification either in terms of target markets or production / sourcing resources.

With regard to the turbulent relationship between China and the US, Hong Kong exporters had again become cautious as to the developing trade tension between the two countries. In total, 69.8% of respondents were concerned that a resurgence in the trade dispute would negatively impact on their export prospects, an increase of 20 percentage points on those expressing the same sentiment in 1Q20. Correspondingly, some 30.2% of exporters were confident they would remain largely unaffected, down from 50.9% in the previous quarter.

Looking to the future, concerns as to when the coronavirus outbreak will officially be deemed over remains the biggest issue for the majority of Hong Kong exporters (64.6%). At the same time, there remains substantial fears over the impact of diminishing global demand (19.5%) and China-US trade tensions (10.8%) among participants in the most recent survey.

The HKTDC Export Index is designed to gauge the prospects of the near-term export performance of Hong Kong traders. The business confidence survey is conducted on a quarterly basis, with 500 participating Hong Kong traders from six major industry sectors interviewed. Any Index reading above 50 indicates an upward trend and an optimistic outlook, while any Index reading below 50 indicates a downward trend and a correspondingly pessimistic outlook.