A Challenging Start To The Year

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Dwayne Rice
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Ryan Lam, CFA Senior Economist ryancwlam@hangseng.com A Challenging Start To The Year Hong Kong s real GDP rose 2.1% in the first quarter of 2015, down from 2.

One bright spot was the unexpected rebound in investment activity despite lingering concerns over the strength of mainland China s economy.

1 Ryan Lam, CFA Senior Economist A Challenging Start To The Year Hong Kong s real GDP rose 2.1% in the first quarter of 2015, down from 2.4% in the fourth quarter of last year and reflecting the tepid pace of economic recovery. The lacklustre GDP growth has its roots in the disappointing performance of private consumption. One bright spot was the unexpected rebound in investment activity despite lingering concerns over the strength of mainland China s economy. Our view is that most of the shortfall in trade activity relative to our expectations is related to transitory factors such as severe weather conditions and the West Coast port strike in the US. A positive turnaround in trade activity is likely to occur over the coming months. That said, we may see continuing weakness in consumption and service exports for some time. We are reluctant to view this as the beginning of an economic slowdown in Hong Kong. However, after accounting for the soft start to 2015 and weaker-thanexpected tourism flows, we have trimmed our GDP growth forecast for 2015 from 2.6% to 2.4%.

2 A tepid performance The Hong Kong government today released its advance estimate of 2015 firstquarter GDP. Our previous research note 1 highlighted the key themes of faltering trade and weakening private consumption and these remain significant factors in the economy s lacklustre performance in the early part of this year. Hong Kong s Q1 real GDP grew by 2.1% 2, down from 2.4% in the fourth quarter of last year. On a quarter-over-quarter basis, real GDP growth grew by 0.4%, little changed from the 0.2% growth recorded in 2014 Q4. Exhibit 1: Real GDP (% YoY, by expenditure) 1Q14 2Q14 3Q14 4Q14 1Q15 Private Consumption Government Consumption Gross Domestic Fixed Capital Formation Exports of Goods & Services Imports of Goods & Services Real GDP Source: Census & Statistics Department of HKSAR, Hang Seng Bank Rebalancing underway The sluggish pace of GDP growth has its roots in the disappointing performance of private consumption. It has long been our view that private consumption growth is set to normalise as the supportive factors that boosted spending growth in the past are unlikely to drive growth as much in the years to come. A small sign of relief was the improvement in the balance of trade, and net exports were less of a drag on growth. Another bright spot was the unexpected pickup in investment despite lingering concerns over the strength of mainland China s economy. Softening private consumption. Private consumption lost some steam in Q1, growing by 3.5%, compared with 4.1% in Q4 last year, which marked the second straight quarter of decline in growth. We deployed an empirical model to identify the underlying causes behind the slowdown in consumption. Our analysis suggests a rise in real interest rates due to lower inflation and a pull-back in consumer confidence were holding back private consumption. That said, it is important to note that the softening in consumption was not as dramatic as had been feared, due mainly to the low unemployment rate and continued increases in wages. 1 Hong Kong Economic Outlook 2015: Bumpy Road Ahead, Hang Seng Hong Kong Economic Monthly, November Changes in this report are on a year-on-year basis unless otherwise stated. 2

3 Renewed appetite for investment. The slowdown in the economy would have been sharper were it not for a meaningful pickup in investment activity. Gross fixed capital formation grew by 7.3% in Q1 compared with 3.4% in Q4 last year. Drilling down into this figure, equipment investments reversed four consecutive quarters of decline and grew markedly by 14.2% in Q1. Construction investment, however, shrank by 3.3% due to an unfavourable base effect. Little traction from external demand. Consistent with weak trade data in Korea and Taiwan, Hong Kong exports began 2015 in a soft patch. Growth in exports of goods and services stayed low at 0.2%, after rising by 0.4% in 2014 Q4. The strengthening US dollar played an influencing role, but unfavourable weather and port disruptions in the US were similarly significant factors. The trade balance improved overall, but this was driven more by sharper fall in import growth than accelerating exports. Imports edged up 0.5% after rising by 1.1% in 2014 Q4. Changes in inventories. Inventories appeared to have been liquidated at a relatively brisk pace, taking 1.5 percentage points off 2015 Q1 GDP growth. This marks the first quarterly contraction in inventory since 2014 Q3, which bodes well for growth in coming quarters. Looking ahead The Hong Kong economy has now experienced two straight quarters of decelerating growth for the first time since The key question is how much of this weakness is due to temporary factors. Despite the general pessimism, our view is that most of the shortfall in trade activity relative to our expectations is related to transitory factors such as severe weather conditions and the West Coast port strike in the US, and we do not, therefore, put much weight on the weakness in Q1 exports. On the other hand, financial markets have turned less bullish on the US dollar as the outlook for the US has become less favourable. We are expecting a confluence of factors improving demand from the US as well as a more stable US dollar to boost the city s trade flows over the coming months. If we are interpreting the data correctly, a positive turnaround in trade activity is likely to occur over the coming months. 3

4 However, we may see continuing weakness in consumption and service exports for some time. With recent changes in multiple-entry visa arrangements for Shenzhen residents and the impact of the strengthening Hong Kong dollar, domestic service providers appear to be facing stiff headwinds. It is also currently hard to imagine that private consumption in upcoming quarters will be as strong as it was before 2011, although recent equities gains will provide a buffer for consumption. That said, our view is that growth contributions from consumption are likely to be of secondary importance in the near future, with investment activity and exports of goods taking centre stage. Overall, our opinion is that this is not the start of an economic slowdown in Hong Kong. We remain relatively sanguine over the outlook for the Hong Kong economy, although we do not foresee a breakout in growth as economic headwinds are likely to persist into the second half. Reflecting the soft start to 2015 and the weakerthan-expected tourism flows, we have trimmed our full-year GDP growth forecast for 2015 from 2.6% to 2.4%. 4

5 Disclaimer This document has been issued by Hang Seng Bank Limited ( HASE ) and the information herein is based on sources believed to be reliable and the opinions contained herein are for reference only and may not necessarily represent the view of HASE. The research analyst(s) who prepared this report certifies(y) that the views expressed herein accurately reflect the research analyst s(s) personal views about the financial instrument or investments and that no part of his/her/their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Nothing herein shall constitute as offers or solicitation of offers to buy or sell foreign exchange contracts, securities, financial instruments or other investments. Re-distribution of any part of this document by any means is strictly prohibited. The information contained in this document may be indicative only and has not been independently verified and no guarantee, representation, warranty or undertaking, express or implied is made as to the fairness, accuracy, completeness or correctness of any information, projections or opinions contained in this document or the basis upon which any such projections or opinions have been based and no responsibility or liability is accepted in relation to the use of or reliance on any information, projections or opinions whatsoever contained in this document. Investors must make their own assessment of the relevance, accuracy and adequacy of the information and opinions contained in this document and make such independent investigations as they may consider necessary or appropriate for the purpose of such assessment. All such information, projections and opinions are subject to change without notice. HASE and its affiliates may trade for their own account in, may have underwritten, or may have a position in, all or any of the securities or investments mentioned in this document. Brokerage or fees may be earned by HASE or its affiliates in respect of any business transacted by them in all or any of the securities or investments referred to in this document. The investments mentioned in this document may not be suitable for all investors. Investors must make investment decisions based on their own investment objectives, financial position and particular needs and consult their own professional advisers where necessary. This document is not intended to provide professional advice and should not be relied upon in that regard. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Investment involves risk. Investors should note that value of investments can go down as well as up and past performance is not necessarily indicative of future performance. This document does not purport to identify all the risks that may be involved in the securities or investments referred to in this document. 5

China GDP grows 6.8% in Q4 2016

China GDP grows 6.8% in Q4 2016 Thomas Shik Acting Chief Economist thomasshik@hangseng.com The 2017 Outlook The mainland China economy expanded by an annual rate of 6.8% in the fourth quarter of 2016, up from 6.7% in the third quarter,