Hong Kong: Unemployment Rises; SARS Further Worsens Outlook
Denise Yam (Hong Kong)
Morgan Stanley
Apr 15, 2003
Unemployment Rises to 7.5% in January-March
Joblessness in Hong Kong rose to 7.5% (seasonally adjusted) in the three months ending March, up slightly from the 7.4% rate in December-February. Total employment slipped by 5,200 on a MoM basis, while unemployed persons (not seasonally adjusted) increased by 4,100 (Exhibit 1). Nevertheless, the latest figures do not yet reflect the negative impact from the outbreak of Severe Acute Respiratory Syndrome (SARS) since mid-March.
Exhibit 1: Labor Market Statistics
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Jan- Dec 02- Nov 02- Oct-
Mar 03 Feb 03 Jan 03 Dec 02
Unemployment Rate, SA, % 7.5 7.4 7.2 7.2
Underemployment Rate, SA, % 2.9 2.9 3.1 3.1
Total employment, mn 3.24 3.25 3.27 3.27
YoY, % +0.6 +0.5 +1.4 +1.1
Unemployment, '000 260.0 255.9 245.6 252.6
Source: Census and Statistics Department, CEIC, Morgan Stanley Research
Decreases in the unemployment rate were seen in the wholesale, insurance and recreational services sectors, while layoffs in the retail, construction, manufacturing and restaurants sectors have not yet picked up significantly. The underemployment rate remained unchanged in January-March at 2.9%, as the data had not yet captured the numbers of employees in the SARS-affected sectors who have been forced on unpaid leave. According to the government, the trends seen in March were in line with labor market adjustments after the Lunar New Year, rather than reflecting the SARS impact. It is possible that a seasonal adjustment will delay the impact of the outbreak on labor market statistics; we expect the deterioration in job numbers to come through in the next few months.
Joblessness Set to Surge amid SARS
The SARS outbreak has dealt a heavy blow to Hong Kong’s labor market. Amid the dramatic drop in business volumes in the travel, hospitality, restaurant and retail sectors, a large number of workers are now being forced on unpaid leave. Should the SARS crisis last for much longer, we believe these workers could permanently lose their jobs. Statistically, we could expect a hike in the underemployment[1] rate, while the full impact on unemployment could come through with a time lag.
While the retail and restaurant sectors have struggled in the past few years amid deflation, the SARS outbreak has proved to be the final straw for some Chinese restaurant chains in Hong Kong, as more than 20 have announced plans to close in the past month, putting more than 1,000 out of work. Nevertheless, we believe that the retail and restaurant sectors are likely to rebound as soon as local consumers become bored with staying at home and will start to go out and spend, in our view. Indeed, anecdotal evidence suggests that the April 12-13 weekend saw considerably more shoppers and diners on the streets than the previous weekend, while retailers and restaurants say that the decline in customer flows has narrowed.
On the other hand, the travel, air transport and hotel industries will likely see a longer lull in their businesses. Single-digit occupancy rates at tourist hotels in Hong Kong are at unprecedented levels. Travel agency employees are also being offered unpaid leave. We believe it will take international travelers considerably longer than their domestic counterparts to regain confidence in Hong Kong. As Hong Kong serves as a stopover for many people with business in China, the hospitality sector is also likely to continue to suffer even after the SARS outbreak is contained, as there are lingering concerns over the Mainland’s handling of the disease.
The wholesale and retail, restaurant/hotel and transport sectors are most at risk stress due to SARS. Exhibit 2 details their significance to the Hong Kong economy.
Exhibit 2: Employment by Sector
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YoY, % % of % of Persons
total total '000
2002 2002 Jan 03 Jan 03
Total -1.0 3272
Manufacturing -10.4 10.0 9.0 291
Construction -3.3 9.1 8.9 288
Wholesale and Retail -0.7 10.1 10.2 336
International Trade 2.1 12.3 12.7 397
Restaurant and Hotels -2.7 7.7 7.5 247
Transport -3.1 9.1 8.9 291
Air, travel and ticket agents, land passenger* 4.1 131
Storage -14.1 0.1 0.1 4
Communications -1.9 1.7 1.6 46
Financing -2.5 4.2 4.1 133
Insurance 7.0 1.2 1.3 40
Real Estate/Business Services -0.1 &nb
* Morgan Stanley Research estimates
Source: CEIC, Morgan Stanley Research
Air transport and travel agents, the hardest-hit groups, make up 20% of
employment in the transport sector, while land passenger transport (buses and
minibuses, trams, railways and taxis), which should see a milder impact from
SARS, make up 25%. On our
estimates, if these sectors cut their workforces by 10%, it would make 71,300
unemployed, or 2.2% of total employment.
This would see the unemployment rate rise by 2.1 percentage points to
9.6%. Should the cut be enlarged to
15%, joblessness would surge by 107,000, or 3.3% of employment, and the
unemployment rate would rise by 3.1 percentage points to an unprecedented
10.6%.
Pay Trends
Could be Exacerbated by SARS
Pay trends could also worsen as a result of SARS in the coming months. The drop in overall earnings of those
workers taking unpaid leave will show up in the household surveys. Meanwhile, weaker economic conditions
and growth this year will likely exacerbate the pressure on deflation, the
labor market and overall salary levels.
Median monthly earnings have already trended down to HK$10,573 in 4Q03,
on our estimates, off 12% from the peak in 1Q02, and not far from the
pre-handover level of HK$10,443. We
would not be surprised to see further drops in overall earning levels this
year, as the government cuts civil service salaries, while the private sector
struggles to maintain profit margins amid persistent deflation.
China's Impact
We believe it remains difficult to assess quantitatively the duration and
impact of the SARS outbreak on the Hong Kong economy,
given the lack of transparency with respect to the situation in China. Should the outbreak hurt foreign
investor confidence in China
and slow capital and trade flows, the impact on Hong Kong
would extend far beyond tourism and restaurant closures.
Hong Kong’s economy appears to be on a
knife-edge. In a year when it is
considered vital to resolve the fiscal deficit, the arrival of the SARS virus
has threatened to put a brake on these much-needed tightening measures.
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