Forecast for Hong Kong

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Silvia Morris
5 years ago
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1 Highlights Despite an unexpectedly strong outturn for Q2 GDP, more recent data show that underlying activity remains weak. Trade flows have faltered after decent July numbers, with the seasonally adjusted value of goods exports in the three months to August down over 5% from the previous period. And the PMI in August remained below the 5 level for the fifth successive month. A mild pick-up in the underlying strength of the external sector is expected towards the end of the year in the light of slightly improved China data, but this will still only take GDP growth for 213 as a whole to 2.7%, followed by 2.8% in 214. The drivers behind consumer spending remain fairly firm, with the unemployment rate stable at 3.3% in August, employment 2.2% higher than a year earlier and wages growing faster than core CPI inflation (4.3% in August). Consumer spending is expected to grow by 4.5% this year and 3.9% in 214. In addition, financial assets rallied through September which should reassure consumers on better China data and the Fed s decision to postpone tapering. Tenyear government bond yields fell back to 2.1% at the end of September, from 2.4% a month earlier, while the Hang Seng gained around 5% over the same period. However, housing market transactions remain very subdued (in response to various government measures). As a result, house prices, especially at the luxury end of the market, are likely to continue their gradual downward correction in the coming months. (Annual percentage changes unless specified) Domestic Demand Private Consumption Fixed Investment Stockbuilding (% of GDP) Government Consumption Exports of Goods and Services Imports of Goods and Services GDP Industrial Production Consumer Prices Current Balance (% of GDP) Government Budget (% of GDP) Current Account ($bn) Trade Balance ($bn) Short-Term Interest Rates (%) Exchange Rate (Per US$) Forecast for Hong Kong For further information contact Jonathan Buss (jbuss@oxfordeconomics.com)

2 Forecast Overview Modest upturn expected in After growth of 1.5% in 212, Hong Kong is forecast to experience only a modest pick-up in activity this year and next. The near-term outlook has deteriorated this year due to external developments, notwithstanding an unexpectedly strong GDP outturn in Q2 213 driven by temporary factors. In particular, we now forecast Chinese GDP growth of 7.4% this year and 7.1% in 214, down from a forecast of over 8% at the start of 213. This will dampen Hong Kong s re-export trade and trade-related services. As a result, there will be a bigger drag from net external trade in the near term; by contrast, elements of domestic demand remain reasonable, albeit exposed to downside risks. We expect Hong Kong s GDP to grow by 2.7% this year and 2.8% in 214. given Chinese growth under 7.5%... Net exports of trade-related services are forecast to be constrained by the more subdued pace of growth in China, while Hong Kong s merchandise exports will be affected by the latter and its wider repercussions for global and regional trade. Subdued pace of growth in China as a hub for merchandise re-export trade, Hong Kong s economy is highly sensitive to world trade conditions, especially those in Mainland China. We now envisage a weaker growth profile over the coming years for China, where the authorities have strongly indicated their willingness to restrain overall credit growth and keep GDP growth at a fairly modest rate in an attempt to rebalance the economy towards consumption and maintain financial stability. This will weigh on Hong Kong s goods reexport trade. Most importantly for GDP growth, much of Hong Kong s service sector (which makes up over 9% of its GDP) consists of trade-related services such as trade finance, insurance and transport. Subdued goods trade is expected to have a negative knock-on effect on these crucial sectors. Soft financial markets non-trade related financial services are another of Hong Kong s key export sectors. Investors re-evaluation of emerging market prospects and uncertainty over policy in the US and China are undermining global financial markets. This will hit non-banking financial services. And the banking sector, which does increasing amounts of CNY business on both sides of its balance sheet, will be Hong Kong: Contributions to GDP % year Domestic demand GDP Net exports Forecast Source: Oxford Economics / CEIC Hong Kong: Exports and imports % year Imports (HK$) Exports (HK$) Source: Census and Statistics Department Hong Kong: Retail sales % year Source: Census and Statistics Department Total volume of retail sales

3 affected by tighter credit conditions and weaker profits on the Mainland. but support from domestic demand However, while the external outlook is more subdued, domestic spending growth should remain fairly solid. Private consumption growth of 4.5% this year should more than make up for modest fixed investment. Supply constraints in construction the property market has boomed in the last few years. However, despite the strong price incentives for new construction, the supply response has been relatively muted due to land constraints and planning laws. The government has outlined plans to increase the supply of land for new construction, which should ensure some impetus for investment in 213. However, investment is unlikely to contribute much to overall growth this year given its weakness in Q1. Robust household finances on the other hand, household finances look quite solid. Ongoing strength is forecast for the core consumer market employment is still increasing steadily while a tight labour market is helping wage growth stay above underlying CPI inflation. However, if financial asset prices weakened again and property prices also fell noticeably, this could undermine the hitherto buoyant luxury end of the consumer spending market. Balanced risks to the forecast The risks to our forecast are broadly balanced: Stronger Asian recovery our forecasts for China are now quite cautious, and there is the possibility of a return to faster growth if consumption and infrastructure spending pick up more strongly. This would lead to higher growth in Hong Kong than in our baseline via a larger boost to net trade. Property crash property prices are currently very high, with price-rent ratios above historic averages. Government measures to cool the market have caused transaction volumes to drop sharply and residential prices to start declining. In our baseline forecast, we expect an orderly correction of around 1-15% from peak over the next year. However, there is a risk of a more abrupt adjustment in the event of unexpectedly rapid monetary tightening in the US or China. Such an event could cause major wealth and financial shocks to domestic demand, potentially sending Hong Kong back into recession. Hong Kong: Consumption and investment % year Consumption Investment Forecast Source: Oxford Economics / CEIC Hong Kong: Asset prices 28H1 = Housing Offices Stockmarket Source: Hang Seng Index Services / Hong Kong Rating & Valuation Dept. Hong Kong: Price-rent ratio, high-end housing Price/rent ratio Private housing Private housing, 1-yr moving average Source: Hong Kong Rating & Valuation Dept.

4 Key Indicators: Hong Kong Percentage changes on a year earlier unless otherwise stated Cement Unemploy- CPI Exports Imports Trade Retail Domestic production ment ex relief US$ US$ balance sales exports % measures (US$ mn) nominal US$ % Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Financial Indicators: Hong Kong Percentage changes on a year earlier unless otherwise stated Int. rate Prime Money Exchange Exchange Exchange Share Reserves 6mth lending rate Supply rate rate rate price (total) % % (M3) HK$/ avg HK$/$ avg HK$/1Y Hang Seng US$ Bn Sep , Oct , Nov , Dec , Jan , Feb , Mar , Apr , May , Jun , Jul , Aug , Sep ,933 -

5 HONGKONG TABLE 1 SUMMARY ITEMS Annual Percentage Changes, Unless Otherwise Specified CONSUMERS REAL PERS. SAVING REAL INDUSTRIAL UNEMPLOY- AVERAGE WHOLE COMPETIT- CONSUMER RESERVES EXPENDITURE DISPOSABLE RATIO GDP PRODUCTION MENT RATE EARNINGS ECONOMY IVENESS PRICES (US$ BN) INCOME (%) (%) PRODUCT- (28=1) (END IVITY PERIOD) (C) (PEDY) (PESR) (GDP) (IP) (UP) (ER) (GDP/ET) (WCR) (CPI) (RES$) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV COPYRIGHT (C), OXFORD ECONOMICS HONGKONG TABLE 2 SUMMARY ITEMS TRADE CURRENT CURRENT GOVERNMENT GOVERNMENT SHORT-TERM LONG-TERM REAL REAL EXCHANGE EXCHANGE BALANCE ACCOUNT ACCOUNT FINANCIAL FINANCIAL INTEREST INTEREST SHORT-TERM LONG-TERM RATE PER RATE PER (HK$ BN) (HK$ BN) (% OF GDP) BALANCE BALANCE RATE RATE INTEREST INTEREST US YEN (HK$ BN) (% OF GDP) RATE RATE DOLLAR (BVI) (BCU) (BCU*1 (GB) (GB*1 (RSH) (RLG) (Note 1) (Note 1) (RXD) (RXYEN) /1 /1 /GDP!) /1 /GDP!) YEARS BEGINNING Q I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV Note 1 : REAL INTEREST RATES = Nominal interest rate (RSH or RLG) - % change in CPI COPYRIGHT (C), OXFORD ECONOMICS

6 Potential output growth 3.%pa Potential output is projected to rise by 3.%pa over the next 1 years, a significantly lower rate than in the previous decade. GDP is set to expand by 2.7% in 213, having grown by 1.5% in 212 and to be slightly below potential growth at 2.8% in 214. As a result, the large output gap of 2.% in 212 will expand in 213 to 2.% and decrease in 214 to 1.3%, and it is not forecast to close fully until 216. The main contribution to growth in potential output over the coming decade comes from expanding capital usage. The.3%pt detraction from shrinking labour usage reflects the.4%pa fall in the working population over the next ten years and an increase in the participation rate which combine to reduce the labour supply by.4%pa. For the capital stock's contribution of 1.7%pt, the main factor is significantly lower investment growth (at 3.6%pa) than in the previous decade. Finally, total factor productivity growth's slightly higher contribution of 1.6%pt reflects the better contribution to potential growth from factors influencing production other than labour and capital over the coming decade. Hong Kong: Real GDP & potential output HKD billions, 211 constant prices quarter moving average Potential output Actual GDP Forecast Source: Oxford Economics Potential GDP and Its Components Average Percentage Growth Potential GDP* Employment at NAIRU Capital Stock Total Factor Productivity *ln(potential GDP)=.65*ln(Employment at NAIRU) +.35*ln(Capital Stock)+ln(Total Factor Productivity) Long-Term Forecast for Hong Kong (Average annual percentage change unless otherwise stated) GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (vs US$) General Government Balance (% of GDP) Short-term Interest Rates (%) Long-term Interest Rates (%) Working Population Labour Supply Participation Ratio Labour Productivity

7 Long-Term Forecast for Hong Kong Annual percentage changes unless otherwise specified GDP Consumption Investment Government Consumption Exports of Goods and Services Imports of Goods and Services Unemployment (%) Consumer Prices Current Balance (% of GDP) Exchange Rate (per $) General Government Balance (% of GDP) Short-term Interest Rates (%) Long-term Interest Rates (%) Working Population Labour Supply Participation Ratio (%) Labour productivity Employment Output gap (% of potential GDP)

8 Background Hong Kong Hong Kong emerged as one of the first Asian tigers, alongside Japan, with annual GDP growth of 8-1% for many years from the 196s to the 199s. There were turbulent periods, specifically related to events in China and issues over the British mandate and handover conditions etc, but these were short-lived. The 1997 handover meant that Hong Kong became a Special Administrative Region (SAR) of China with its own appointed legislative council (LEGCO) and a continued independent monetary authority (the HKMA). However, the handover coincided with the onset of the Asian crisis in 1997 and the bursting of the local property and stock market bubble that had built up prior to handover. As a result the economy suffered a severe recession and financial market turbulence in Moreover after a strong 2 the recovery was slow in 21-3, with both consumption and investment undermined by a weak property market. And the impact of the SARS outbreak in the first half of 23 was another major negative. But as the mainland s boom gathered pace and its trade with the rest of the world soared, with a significant percentage going through Hong Kong, the latter s economy soon responded recording annual GDP growth of 7% or higher in 24-6 and 6.4% in 27. With regard to domestic spending, household consumption rose more strongly (6.1% pa) during this period than investment (4.3% pa), indeed the level of the latter in 27 was still below that seen ten years earlier. Inevitably given Hong Kong s dependence on world trade (exports of goods and services were 212% of GDP in 28), the economy was severely hit by the global crisis, with GDP 7.8% down year-on-year at its weakest point in 29Q1. However, the easing of the recession in the main developed economies and the rapid bounce back in the mainland helped trigger a recovery from Q2 onwards. With the finance and property sectors recovering, GDP grew 6.8% in 21 and 4.9% in 211 after a 2.5% fall in 29. Already a major trading and financial hub in Asia, Hong Kong s position has been greatly enhanced by the rise of China as an economic superpower. Although domestic merchandise exports have dwindled, overall export growth has remained high due to the steady increase in throughput trade, the services associated with this, and the strong growth in financial services (whose expansion has been driven by meeting both the requirements of companies and individuals from the mainland as well as those of foreign companies seeking to invest in China. The different legal setting to that on the mainland has ensured that the financial sectors in both Hong Kong and Shanghai have grown very strongly in recent years). According to the Census and Statistics Department, the four key industries in the economy accounted for almost 6% of GDP in 27 (up from 52% in 23) financial services 19.5% and responsible for most of the increase, tourism 3.4%, trading and logistics 25.8%, and professional services 3.9%. By contrast manufacturing and construction only accounted for 2.5% and 2.6% of GDP respectively in 27 (the remainder consisted of domestic-oriented services). A key anchor to the Hong Kong economy has been the HKD peg to the US$, backed by a large pool of foreign exchange reserves. This was maintained throughout the 1998 Asian crisis despite intense speculation that, among the slump in Hong Kong s trade and economic activity triggered by the crisis, the authorities would not be able to prevent the collapse of the peg, particularly as soaring interest rates were exacerbating the intensity of the recession. But in response to international investors attempting to build positions on the back of an expected devaluation of the HKD peg, the Hong Kong Monetary Authority adopted an unusual policy in retaliation buying a large stake in the stock market to halt the slide. This move successfully quelled the speculation and facilitated the subsequent turnaround in the economy. Donald Tsang, then financial secretary, was widely credited with this policy success. More recently, speculation has focused instead on the implications for Hong Kong and its currency peg of the anticipated appreciation of the Chinese CNY. Certainly the change to a floating exchange rate regime in China in July 25 opened up the possibility that the HKD peg might be dropped eventually, with implications for currency management, monetary policy and reserves. And while the onset of the global crisis and the Chinese decision to effectively re-peg the CNY from July/August 28 onwards halted that debate for a time, the improvement in global financial sentiment since mid-29 and the clear evidence of very strong GDP growth on the mainland re-ignited expectations that the CNY peg might be removed (associated with this were very heavy capital inflows into Hong Kong reserves soared in late 29 and have since climbed further to over US$3bn in Q1 213).

Key Facts Politics Head of state: President of China XI Jinping Head of government: Chief Executive Chun-ying LEUNG Political system: Limited democracy Date of next executive election: March 217 Date

9 Key Facts Politics Head of state: President of China XI Jinping Head of government: Chief Executive Chun-ying LEUNG Political system: Limited democracy Date of next executive election: March 217 Date of next legislative election: September 216 Currency: Hong Kong dollar (HKD) Long-term economic & social development * GDP per capita (US$) Inflation (%) Population (mn) Urban population (% of total) Life expectancy (years) Source : Oxford Economics & World Bank Structure of GDP by output * 212 or latest 29 available year Agriculture.1% Source : CIA Factbook Industry 7.4% Location : Eastern Asia, bordering the South China Sea and China Services 92.6% (CIA Factbook) Source : World Bank Long-term sovereign credit ratings & outlook Corruption perceptions index 212 Foreign currency Local currency Score Fitch AA+ (Stable) AA+ (Stable) Developed economies (average) 74.8 Moody's Aa1 (Stable) Aa1 (Stable) Emerging economies (average) 38. S&P AAA (Stable) AAA (Stable) Hong Kong 77. Emerging Asia 35.4 Structural economic indicators * Current account (US$ billion) Trade balance (US$ billion) FDI (US$ billion) Govt net debt stock (HK$ bn) Govt balance (HK$ billion) Foreign exch.reserves(us$ bn) Source: Transparency International Scoring system 1 = highly clean, = highly corrupt Composition of goods & services exports, 211 Other goods exports 4.6% Transportation 5.7% Oil production ( bpd) Oil consumption ( bpd) Source : Oxford Economics / World Bank / EIA Destination of goods' exports (211) China 54.1% European Union (27) 1.2% United States 9.4% Japan 3.8% India 2.7% Source : WTO Source : WTO Manufactures 7.7% Fuels and mining products 2.% Travel 4.8% Other commercial services 1.6% Agricultural products 1.6%

Forecast for Hong Kong

Forecast for Hong Kong Highlights GDP in Q2 is quite likely to be even weaker than the.2% quarterly rise in Q1. Latest trade data show the extent to which the lack of momentum on the Mainland is hindering activity in Hong Kong