Hongkong's Miracle Statistics

 

Do you sincerely believe that the "real" Hongkong economy grew 14% in the first quarter of this year? A straw poll suggests that few do, with even some of the ever bullish stock brokerage salesmen/economists expressing reservations.

In itself one wacky number, or even a series, may not matter very much. But as the once much praised Housing Authority has found, a reputation once tarnished is difficult to re-embellish. Those in charge of Hongkong statistics did not enhance their reputations last year with the bizarre and hastily compiled estimates they put out - in contradiction of their own previous assessments - of the numbers of mainland born illegitimate children of Hongkong residents. Likewise their assessments of the commercial benefits of the government's investment of land, concessions and cash in Disney were sorely lacking in the detailed and independent analysis that such departments should provide.

So it is reasonable to submit the 14% growth claim to further analysis and ask whether figures are being presented so as to please the ear of the Chief Executive and make life easier for spokesman Stephen Lam. Spin doctoring is the legitimate occupation of spin doctors, not of statisticians. How did Hongkong suddenly vault to the top of the Asian recovery league overtaking Malaysia, Korea and other beneficiaries of low exchange rates, low interest rates and superior exports?

The most basic fact in the First Quarter data is that in terms of current Hongkong dollars, what you and I and every firm uses, total GDP grew by 6.2% compared with the same period last year. Within the constraints of GDP data generally, this is not an unreasonable figure. We know that trade and tourism have picked up very strongly compared with the abyss a year ago and that private consumption is reviving. However we also know that unemployment though falling gradually is still at a high 5.5%, that interest rates are high and rising and that there is no appetite for investing in that once sacred cow, real estate.

So 6.2% or a bit more to take account of some price falls seems reasonable. How then do we get to 14%? Answer: Throw in a negative GDP deflator of a whopping 7.1% so that 6.2% growth in money terms translates into 14.3% in so-called "real" terms. In other words, prices across the economy are supposed to have declined by 7%, making us that much better off in real terms. But is this really the case?

Take consumer prices. These, according to the government, fell 5.1% in the first quarter compared with a year ago. But analysis shows this to be huge exaggeration of reality. The biggest contributor to the CPI fall was housing which accounts for 29% of the composite index. According to the data, housing costs overall fell 10.3%. But this figure is a nonsense. Cost of public housing, which accommodates 45% of the population was down 0.6%. The rest of the index is based on private rental. But less than 10% of people live in private rented accommodation. The rest are owner occupiers who are primarily affected by mortgage rates which are not included anywhere in the CPI. For the record, the average prime rate was marginally lower in the first quarter than a year earlier - 8.6% compared with 8.7% in Q1 1999. Adjust housing to the real world, an overall composite CPI fall of 2.5% seems more realistic.

But the official CPI figure is at least explicable, even if the data used is flawed. That cannot be said for the 7.1% GDP deflator which is telling us that overall prices have been falling even faster than the CPI. Oh yes? First lets take a look at foreign trade which is a huge contributor to GDP, even though most merchandise trade is now re-export business not local manufacture. The data tells us that unit values of both imports and total exports were virtually unchanged over the 12 month period. Local producer prices fell 1% but those of retained imports actually increased by 2% as terms of trade and the trade weighted exchange rate index both fell slightly

There are no figures available on service sector import and export prices but no international indicators, such as those issued by the US, show no signs of a sharp decline. What about other local costs? Labour costs, whether measured by nominal wage rates or average earnings fell 1% while employment increased by 3.6%. Tender prices for public works fell 4% the building cost index rose 1% The only cost figure which comes anywhere near the 7.1% deflator is the rental index for office space - down 6.3% on the year. The retail rental index actually rose 1% presumably reflecting the pick up in consumption.

Conceivably the 7.1% derives from some arcane mathematics concerned with the ratio of imports to exports. But even that would now seem hard to explain given that the merchandise deficit has returned to more normal levels ($24 bn in Q1) from the very low number ($13 bn) a year ago when domestic demand was very weak.

So the only number I can find which just might get us to 7.1% is not even mentioned in the 190 page printed version of the First Quarter report which merely blandly tells us that "the momentum of inventory buildup, which began in the middle of 1999, accentuated further". The data available on the government web site tells us some details which are nothing short of mind boggling. We learn that in current prices inventories rose by $5.20 bn. Nothing very unusual there, though it was a big increase representing 1.7% of GDP for the quarter. However in constant 1990 prices the inventories rose by almost the same amount as in current prices -- $5.04 bn.

Are we expected to believe that at a time when import prices are rising, and even the dubious GDP deflator is 45% above its 1990 base, inventories are being replenished at the prices of a decade ago? It is not clear how these inventory numbers - an erratic guesstimate at the best of times - work their way into the overall deflator and GDP numbers.

But let us stop kidding ourselves about 14% growth and 7% deflation. What's wrong with 8.5% real growth with 2.3% deflation? Or are we to go down the mainland path of wishful thinking just at a time when Beijing's national statistical bureau is trying valiantly to bring some realism to provincial exaggerations? The problem now is that when the inflation numbers adjust to reality, the headline "real" GDP is going to look much sicker than it really is. Or other means will have to be found to achieve a soft landing for the statisticians.

 ends
SCMP June 2 

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