Real Gross Domestic Product (GDP) of Hong Kong increased 0.9 percent in the first half

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1 Economic Prospects of Hong Kong in Win Lin Chou, City University of Hong Kong Prepared for United Nations Project LINK Meeting in New York, October 22-24, 2012 I. The Current Trends Real Gross Domestic Product (GDP) of Hong Kong increased 0.9 percent in the first half of 2012 compared to the 6.5 percent growth in the same period last year. The deceleration in real GDP largely reflected a sharp deceleration in exports of goods and services. Total exports of goods and services declined 1.9 percent in the first half of 2012, in contrast to an increase of 7.9 percent in the first six months of The major contributor to the overall economic growth in the first half of 2012 comes from the domestic sector. Private consumption increased by 5.1 percent in the first half of 2012, and contributed 3.3 percentage points to the 0.9 percent of GDP growth. Fixed investment increased 9.0 percent, contributing 1.8 percentage points to real GDP growth. Inventory investment declined in the first half of 2012, subtracting 1.6 percentage points to real GDP growth. Total exports of goods and services declined in the first half of 2012, contributing -4.1 percentage points to GDP growth. The negative contribution of total exports of goods and services was offset by the contribution of the total imports of goods and services which was 1.2 percentage points. Thus, net exports of goods and services subtracted 2.9 percentage points to real GDP growth. Hong Kong s external sector is facing considerable challenges with a slowdown of growth in the Chinese economy, uncertainties in the recovery of the U.S. economy, and the GDP growth in the Euro area contracting. Merchandise exports (consisting of re-exports and domestic exports) decreased 4.5 percent in real terms in the first half of 2012, following the 2.0 percent decline in second half of Re-exports decreased 4.1 percent in the first half of 2012, while domestic exports decreased 22.4 percent in real terms. Domestic exports only accounted for 2.6 percent in total exports of goods in the first half of 2012, indicating re-

2 exports are the key export growth driver of Hong Kong. Total exports of goods to all major markets declined in the first half of 2012 due to weak demand. Exports of goods to the Chinese Mainland, and the United States decreased 4.2, and 3.3 percent in real terms, respectively. Total merchandise exports to Germany registered the largest decline of 19.8 percent in real terms, while those to the United Kingdom, Singapore, and Japan declined by 7.8, 6.1, and 0.1 percent in real term, respectively. The Chinese Mainland remains to be the largest trading partner of Hong Kong, accounting for 49.4 percent of the value of total trade (exports and imports of goods combined) in the first seven months of Since 2000, Hong Kong s services exports have become an important contributor to real GDP growth. They increased 2.5 percent in real terms in the first half of Analyzed by sector, exports of transportation services increased 1.5 percent in real terms in the first half of 2012, as compared with 2.9 percent recorded in the same period a year ago. The deceleration reflected the weak performance in the external trade sector and cargo flows. Merchanting and other trade-related services began to decelerate since the second half of last year. They shrank by 0.5 percent in the first six months of 2012, down from the modest increase of 2.0 percent recorded in the second half of On the other hand, benefited from the continuing pickup of inbound tourism, travel services increased 9.9 percent in the first half of 2012, following the 14.3 percent growth in 2011 as a whole. Finance and insurance services, which accounted for 23 percent of Hong Kong total service exports in the first half of 2012, experienced almost no growth (0.3%) in real terms in the first half of 2012, as compared to the 11.6 percent gain in 2011 as a whole. Consistent with the deceleration in total exports of goods, imports of goods decreased 2.7 percent in real terms in the first half of 2012, down from the 1.7 percent increase in the 2

3 preceding six months. Within the total imports of goods, retained imports increased a mere 1.1 percent in real terms in the first half of 2012, decelerating sharply from the 11.5 per cent increase recorded in the second half of last year. The deceleration in retained imports was mainly due to the 12.4 percent decline in retained imports of raw materials and semimanufactures, and the decrease of 7.0 percent in retrained imports of fuels. With the ease of the upward pressures on import prices, the overall import prices rose by 4.5 percent during the first six months of 2012, compared to the 8.1 percent increase in 2011 as a whole. Import prices of fuels continued to moderate, increasing 10.0 percent in the first half, following a sharp of 37.1 percent in the second half of The deceleration of the overall import prices reflected the deceleration in global food, oil, and other commodity prices than a year ago. Helped by the buoyant domestic sector, the labor demand remained strong. The unemployment rate (not seasonally adjusted) was 3.4 percent last year, and dropped slightly to 3.2 percent during the period of June to August 2012, and is the lowest since the first quarter of Analyzed by major economic sector, unemployment rates (not seasonally adjusted) were found to decline in construction, manufacturing, retail, transportation, storage, postal and courier services, real estate sectors in the second quarter of 2012 over the first quarter, with the most significant improvement taking place in the construction sector. Unemployment rate in the construction sector fell to 4.6 percent in the second quarter, from the 6.1 percent of the preceding quarter. To measure the consumer price inflation, four series of Consumer Price Indices (CPIs) are available in Hong Kong, namely, CPI(A), CPI(B), CPI(C), and Composite CPI, with the Composite CPI reflecting consumer price changes on the household sector as a whole. The 3

4 Composite CPI inflation was 4.2 percent in the first eight month of 2012, compared to 5.1 percent a year earlier. For the aggregate price in the economy, the change in GDP price deflator moderated to 3.0 percent in the first half of 2012, from the 4.3 percent increase in the second half of II. Forecast Summary for Hong Kong s economic growth in 2012 has been dampened by the severe uncertainties in international environment. Real GDP is expected to increase 1.4 percent in 2012 as a whole, following a growth of 5.0 percent in These unfavorable conditions are expected to continue in 2013, and the economy is forecast to grow at a moderate rate of 2.3 percent. Similar to 2011 and 2012, the domestic sector is expected to be the main contributor to this growth. Private consumption expenditure is expected to increase 4.5 percent in 2013, and to contribute 3.3 percentage points to real GDP growth. Hong Kong s external sector is expected to continue to face challenges. Hong Kong s total exports are forecast to increase 0.9 percent in 2013, following a forecast decrease of 2.1 percent in We expect the inbound tourism to continue to grow at 13.3 percent in 2013 following a forecast increase of 14.9 percent in Thus, the travel services component of the exports of services should increase 9.2 and 7.8 percent this year and next, respectively. However, the slowdown in the other components of exports of services such as transportation services, merchanting and other trade-related services, and other services will only boost exports of services by 2.1 percent in 2012, and 2.7 percent in 2013, following a 6.7 percent growth in Total fixed investment should pick up at 6.6 percent in 2013, following an expected increase of 5.7 percent in We expect the government spending to grow at 2.7 percent 4

5 next year, following a rise of 2.9 percent in The above conditions suggest the real GDP growth is forecast to be 2.3 percent in 2013, following a forecast increase of 1.4 percent in 2012 (see Table 1 for details). As regards the inflation rate, we expect the moderate import prices in foodstuffs and fuels, exports prices of services, and lower US inflation rate will continue to influence the CPI inflation rate this year and next. CPI inflation is forecast at 4.0 percent in 2012, and 3.2 percent in The implicit price deflator of GDP, another measure of inflation, is forecast to increase 2.6 percent in 2013, down from a forecast 2.9 percent forecast this year. Despite the slower economic growth, the labor market condition remains tight. With the growth in the domestic sector remaining to be strong, the unemployment rate is forecast to be at low level of 3.2 percent this year and the next. III. Policy Issues Mr. C.Y. Leung, who was elected to succeed Mr. Donald Tsang to become the 3 rd Chief Executive (CE) of Hong Kong, assumed office on July 1, The Hong Kong government announced in August that the CE s Policy Address will move to 16 January, 2013, it is expected that he will focus on the measures for housing, healthcare, education, and environment. At present, housing and the ageing population are the main concerns of the Hong Kong public. To ensure the healthy and stable development of the property market, the Hong Kong government has since early 2010 introduced a series of measures to increase flat supply. In April, June, September and December of 2011 the government had successively announced the quarterly land sale programs to ensure a steady and sufficient land supply to the market. 5

6 In his Policy Address given in October 2011, the former CE Mr. Donald Tsang announced the resumption of the Home Ownership Scheme and enhancements of the My Home Purchase Plan in order to help low and middle-income families buy their own homes. To further regulate the sale of first-hand residential properties, the Transport and Housing Bureau (THB) will set up a steering committee to discuss issues on regulating the sale of first-hand flats by legislation and to put forward practical recommendations within a year. With the third round of quantitative easing (QE3) announced by the US Federal Reserve on September 13, 2012, HKMA expects more capital inflows through the US banking system into Hong Kong s property markets. To strengthen risk management in property mortgage lending of banks, the HKMA, on September 14, issued guidelines to banks on tightened underwriting criteria for loans to borrowers with multiple property mortgages. For mortgage loan applicants who have already borrowed or guaranteed outstanding property mortgage loans for one or more properties, the banks are required to take a series of prudential supervisory measures at the time of loan application. These measures include lowering the maximum debt servicing ratio from the current 50 percent to 40 percent, lowering the maximum loan-to-value ratio from 40 percent to 30 percent, and the maximum loan tenor of all new property mortgage loans is limited to 30 years. The HKMA also announced these measures take immediate effect. 6

7 Table 1 Forecast rate of change in GDP, GDP deflator and CPI in Actual 2011 Actual 2012 H1 Forecast 2012 Forecast 2013 Real GDP Private consumption expenditure Government consumption expenditure Gross domestic fixed capital formation Exports of goods and services Exports of goods Exports of services Imports of goods and services Imports of goods Imports of services GDP deflator Composite CPI