Does Private Consumption Drop Cause Recession, or Does Recession Cause Private Consumption Drop? — A Study of Hong Kong Case 2019

First, the annual change in total private consumption in Hong Kong has experienced a rare negative growth in the third quarter of 2019. The cause is commonly believed to be the global economic recession, the US-China trade war, and the social unrest and the strike action in Hong Kong. Since Private Consumption accounts for the largest share (68.3%) of GDP of Hong Kong (Figure 1), thus whenever private consumption falls, it is often accompanied by a recession.

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Figure 1 Percentage of Hong Kong’s economic sectors as a percentage of economic output, 2018. Source: Trade Development Council (2019) [1]

But is the recession driving private consumption to fall, or are there other external factors that cause private consumption to fall, which in turn causes the recession?

Due to inflation and population growth, private consumption generally continues to grow positively in long term, but in case of an economic recession, the expected and actual number of unemployed people increase, which is reasonably leading to a decline in private consumption; Yet, another hypothesis is that due to some exogenous factors such as strike action or support for consumption-reduction actions, private consumption has fallen, thus causing a recession. In the past 10 months, Hong Kong has experienced both of these situations at the same time (recession and strike). The real reason for the decline in consumption has to be further studied.

In terms of data, the annual growth rate of private consumption has dropped from +1.3% in the second quarter of this year to -3.5% in the third quarter. Although the decline is smaller than other groups, the impact on GDP growth is crucial because of its large proportion (Figure 2):

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Figure 2 Annual growth rate of various components of Hong Kong’s GDP, comparison of the second and third quarters of 2019, source: Hong Kong Census and Statistics Department [2]

The composition of private consumption is dominantly represented by the two components, viz “retail sales amount” and “restaurant receipts”. Figure 3 shows the monthly annual rate of change in the total retail sales amount in 2018–2019. It is noted that a series of negative rates of growth from February 2019 to the latest September figures. They are deteriorating fast, as the latest figures for August and September declined more than 20%, breaking the record of the past decade. However, as the decline is of double-digit percentage in magnitude, they are far earlier than the strike action, it implies that some of the reasons are not related to recent local factors such as the strike and social unrest.

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Figure 3 Annual Change in Hong Kong’s Retail Values ​​September 2018-September 1919. Source: Trading Economics

However, retail data is difficult to analyze, because of the popularity of internet technology and smartphones, more and more shopping can be done through online shopping, while the statistics of total retail sales amount statistics are limited to physical retail sales, without caring about online shopping.

Unfortunately, there is no data for online shopping, and it is hard to estimate and accurately count, especially the online shopping platform for second-hand items and/or via a non-local transaction platform, etc., so the decline in some retail sales may be due to more and more consumers changing from physical store shopping to online shopping. Furthermore, social unrest will also encourage more consumers to switch to online shopping due to safety concerns. In other words, the total retail sales amount data has significant shortcomings in measuring changes in private consumption.

The restaurant receipts data share similar situations. If people do not go out to eat, they normally switch to take their meals at home. But this would cause directly a reduction in GDP (because GDP does not count the output value of household chores), and secondly, it would also affect the demand of commercial property, which would indirectly affect GDP.

Figure 4 shows the restaurant receipts value index and its annual change. It has continued to grow positively over the past decade, with an average annual growth of 4%. However, it has had a negative value since April this year (or had a negative value since Feb this year if calculated by the quantity index). The latest September fall was as high as -13.1%, which is much larger than the decline in the Global Financial Turmoil 2009.

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Figure 4 Hong Kong Restaurant Revenue Value Index and its annual changes 2009 — September 2019. Source: Hong Kong Census and Statistics Department [3]

Among the four sub-categories, three of them have recorded substantial reductions in the YoY change, which include Chinese Restaurants, Non-Chinese Restaurants, and Bars. Only fast food shops’ receipts value continues to rise. This usually reflects weak consumer confidence and thus switching from the consumption of high-end restaurants to more economical fast food shops.

Figure 5 shows that the YoY of the Chinese Restaurants Receipts Value Index has declined since February 2019, but the decline has widened to double digits since June, with the latest figure of September at -20.3%. The decline in non-Chinese restaurants is less severe than that of Chinese ones. The decline was -14.5% in September 2019, and its negative growth started in April; the Bar’s revenue has been falling abruptly since June 2019, and plummeted to double-digit falls, up to -18.8% in Sep 2019. It is probably related to the reduction of tourists after the issuance of tourist warnings by many countries in June.

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Figure 5 Annual Change in the Return Value Index of Four Restaurants in Hong Kong 2009 — September 2019. Source: Hong Kong Census and Statistics Department [3]

Most of the components of private consumption have seen a significant decline since June, reflecting a sudden change in the market since then. However, due to the suspension of the US-China trade negotiations almost during the same period, and it was not resumed until October, but the private consumption data for October has not yet been available. Whether the recession causes private consumption drop or the recession is caused by the drop in private consumption may have to wait until the October data is released next month.

References:

[1] Hong Kong Trade and Development Centre (2019) Economic and Trade Information on Hong Kong, 25 Oct. http://hong-kong-economy-research.hktdc.com/business-news/article/Market-Environment/Economic-and-Trade-Information-on-Hong-Kong/etihk/en/1/1X000000/1X09OVUL.htm

[2] Census and Statistics Department (2019) Advance estimates on Gross Domestic Product for third quarter of 2019,HKSAR Government, 31 Oct. https://www.censtatd.gov.hk/press_release/pressReleaseDetail.jsp?charsetID=2&pressRID=4506

[3] Census and Statistics Department (2019)
Table E088 : Restaurant receipts by type of restaurant,HKSAR Government, 5 Nov. https://www.censtatd.gov.hk/hkstat/sub/sp320_tc.jsp?productCode=D5600088

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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