Jobless rate to edge up to 4% by end-2013

Thanks to the climb in consumer spending.

According to Hang Seng Bank's Hong Kong Economic Monitor, in tandem with positive signs from the external front, Hong Kong’s consumption picture took a turn for the better over the last couple of months.

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There is no denying that the buoyant labour market has provided an important backstop during the current global weakness. The degree of adjustment seen in the labour market has been relatively muted.

The job figures are, however, well known to be a lagging economic indicator. The unemployment rate may rise in a way to reconcile the discrepancy with lackluster economic performance since 1Q12.

Nevertheless, we do not see much risk for a spike in the jobless rate beyond 4%. A closer examination of the job figures suggests that structural factors might have played an important role in improving the resilience of the labour market.

The key difference between the current and previous downturns is that manufacturing, import & export trade, wholesale & retail and transportation & storage sectors, which tend to be hardest hit by the global slowdown, are much less labour intensive than they were a decade ago.

Specifically, it takes at least 20% less amount of workers to produce one unit of output in these sectors. The fact that the hardest-hit sectors contribute much to GDP but relatively little to employment, help explain why jobless rate is not responsive to the slowdown in GDP growth.

Going forward, we see the unemployment rate climb gradually to 4% by the end of 2013. The momentum gained in consumer spending, which now accounts for 66% of real GDP, will carry over into 2013 since labour income growth has been on a positive trend and wealth effects have turned from neutral to positive.

Yet renewed inflation pressure will weigh on purchasing power to some extent. Based on these estimates, our model suggests a 3.8% growth in real private consumption in 2013.