ECONOMIC PROSPECTS FOR HONG KONG IN 2014-15 Win Lin Chou, ACE Centre for Business and Economic Research, Hong Kong I. The Current Trends Real gross domestic product (GDP) in Hong Kong slowed to 1.8 percent in the second quarter of 2014, after increasing 2.6 percent in the first quarter. The deceleration in GDP growth in the second quarter of 2014 primarily reflected negative contributions from fixed investment, and exports of services that were partly offset by a positive contribution from consumer spending, changes in inventories, and exports of goods. Private consumption expenditure slowed down to 1.2 percent in the second quarter from an increase of 1.5 percent in the first quarter. This moderate growth in consumer spending in the second quarter reflected slowdowns in spending both for goods and services. The slowdown in spending for goods primarily reflected a sharp deceleration in durable and nondurable goods. Private consumption expenditure contributed 0.8 percentage points to the real GDP growth in the second quarter. Gross domestic fixed capital formation decreased 10.0 percent in the second quarter, contributing -1.5 percentage points to the change in real GDP. The drop in gross fixed investment primarily reflected a downturn in private investment in machinery, equipment and intellectual property products. There is an upturn of 2.3 percent in exports of goods but a decrease of 2.3 percent in exports of services in the second quarter, resulting in an increase of 1.4 percent in total exports of goods and services, after rising 1.1 percent in the first quarter. Total exports of goods and services contributed 3.3 percentage points to the growth of real GDP. Imports of goods and services showed a slight acceleration in the second quarter by increasing 1.5 percent, following an increase of 1.0 percent in the first quarter. Total imports of goods and services contributed -3.7 percentage points to change in real GDP in the second quarter. Overall, the GDP growth in the second quarter of 2014
comes from the domestic sector with inventory investment being the largest contributor, contributing 2.6 percentage points to real GDP growth. In the external sector, total exports of goods compiled under the GDP accounting system, accelerated from the 0.5 percent in real terms in the first quarter to 2.3 percent in the second quarter. This rebound largely reflected improvement in the global economic environment during the second quarter. Excluding the sharp decline in exports of nonmonetary gold, total merchandise exports increased 4.3 percent in real terms in the second quarter. Analyzed by major markets, merchandise exports to Chinese mainland (the Mainland hereafter) accelerated to 4.5 percent in real terms in the second quarter after a 2.9 percent downturn in the first quarter. While exports to India and Korea accelerated in the second quarter, those to Japan and Singapore recorded downturns. The pickup in exports to the United States continued in the second quarter by 3.1 percent in real terms after increasing 3.9 percent in the first quarter. Exports to the EU accelerated in the second quarter, rising 4.3 percent in real terms after a 1.2 percent increase in the first quarter. With a share of 98.3 percent in the total merchandise exports by value, re-exports are the key driver in Hong Kong s total exports. They increased 4.1 percent in real terms in the second quarter, reflecting a significant reverse from the contraction of 0.4 percent in the first quarter. In contrast to the pickup in the total exports of goods in the second quarter, Hong Kong s services exports decreased 2.3 per cent in real terms in the second quarter of 2014, after increasing 3.3 percent in the first quarter. The downturn primarily reflected a significant decrease of 11.5 percent in travel services which measure the goods and services consumed by visitors in Hong Kong. There was a 12.5 percent increase in inbound tourism in the first six months of 2014, the 11.5 percent decline in travel services mainly suggests a 2
slowdown in per capita spending by Chinese visitors in Hong Kong in response to a crackdown on corruption in the Mainland. Merchandise imports increased 3.7 percent in real terms in the second quarter, accelerating from an increase of 1.1 percent in the preceding quarter. Within the total merchandise imports, retained imports decelerated from 4.8 percent recorded in the first quarter to 2.6 percent in the second quarter. The deceleration largely reflected a dramatic downturn in retained imports of capital goods by 11.5 percent from a 6.1 percent increase in the preceding quarter. Despite the slowdown in the domestic demand sector in the second quarter of 2014, the demand for labor remained tight, as indicated by low unemployment rates. The unemployment rate (not seasonally adjusted) was 3.3 percent in the second quarter of 2014, rising from the 3.1 percent of the preceding quarter. Analyzed by major economic sector, during the second quarter, the unemployment rates (not seasonally adjusted) dropped in all sectors, except five sectors which include manufacturing; import/export trade; retail, accommodation and food services; transportation, storage, postal and courier services, information and communications; and real estate services. Prices of goods and services purchased by Hong Kong residents, as measured by the GDP price deflator, accelerated to 3.5 percent in the second quarter of 2014 from 2.2 percent recorded in the first quarter. Within the GDP deflator, all price components accelerated in the second quarter except the price deflator of changes in inventories, which rose by 7.6 percent after increasing 13.1 percent in the first quarter. While the GDP deflator accelerated significantly in the second quarter, the Composite CPI inflation was 3.6 percent in the second quarter, slower than the 4.2 percent of the first quarter, primarily reflecting the moderation in food, residential rentals, and in prices of 3
electricity, gas and water. However, the Composite CPI inflation accelerated slightly in July and August due to sharp increases in prices of electricity, gas and water. II. Forecast Summary for 2014-15 Being a small and open economy, the economic performance of Hong Kong is largely affected by the economic conditions of Hong Kong s trading partners. China s exports reverted to a positive growth of 0.9 percent in value terms in the second quarter of 2014 after decreasing 3.4 percent in the first quarter. The manufacturing purchasing managers index (PMI) also showed improvement during the first eight months of 2014. Real GDP increased 7.4 percent in both the first and second quarter of 2014, after growing at 7.7 percent in 2013. China s real GDP is expected to increase 7.5 percent in 2014 as a whole and we assume it will increase at the same rate in 2015. There was a sharp upturn in real GDP growth of the United States in the second quarter of 2014, following a drop in the first quarter. We expect the pace of recovery in the US economy to accelerate in the second half of 2014 and in 2015. Real GDP is assumed to increase 2.5 and 3.2 percent in 2014 and 2015, respectively. As regards the Euro area, the recovery remains slow and fragile. The GDP figures released by the statistical office of the European Union showed the GDP in the Euro area recorded no growth during the second quarter of 2014, following a marginal 0.2 percent growth in the first quarter. The German economy experienced a contraction of 0.2 percent in the second quarter after a 0.7 percent increase in the first quarter. The recovery in other European countries is encouraging. The GDP in the U.K. economy increased 0.8 percent in the second quarter, the second consecutive quarter-to-quarter increase of 0.8 percent. This 4
also gives some reason for optimism for the coming year. Additionally, the economic conditions in the emerging economies, in particular the developing Asian economies, should continue to improve in the second half of 2014 and in 2015. Our forecast indicates the total exports of goods will grow moderately at 1.7 percent and 2.0 percent, respectively, in 2014 and 2015. During the first seven months of 2014, the inbound tourism rose by 12.3 percent with that from China growing at 15.5 percent. We have expected the inbound tourism to increase at a rate of 13.0 percent in 2014 as a whole, and in 2015 as well. However, taking into account the impact of the pro-democracy protests and the civil disobedience campaign that took place during China s National Day holiday periods on the tourism industry, the forecast on the 2014 inbound tourism may now look a bit optimistic. The decline of exports of travel services is likely to continue in the second half of 2014. This downturn together with the pickups in exports of transportation services, and in exports of finance and business services will boost exports of services by 1.2 percent in 2014, and 2.1 percent in 2015. In line with the slowdown in private consumption in the first six months of 2014, we expect private consumption to increase 1.6 percent in real terms in 2014, and 3.0 percent in 2015. Total fixed investment spending had a sharp downturn of 5.6 percent in the second quarter, after an increase of 3.5 percent in the first quarter. This drop is expected to continue, and the total fixed investment is forecast to grow at a marginal rate of 0.1 percent in 2014, and at 1.9 percent in 2015. The government spending is assumed to increase 2.7 and 3.0 percent in 2014 and 2015, respectively. These conditions suggest the economic growth should start to pick up in 2015, and the driving force of the economic growth should come 5
from the domestic sector rather than the trade sector. Real GDP growth is forecast to be 2.4 percent in real terms in 2014, and 2.8 percent in 2015. (See Table A in Appendix for details). In the first eight months of 2014, the Composite CPI inflation rate stood at 3.9 percent. The increase in rentals on private and public housing, by an average of 5.1 percent in the first eight months, was one of the main forces lifting inflation rate. Another inflation lifting force is the increase in electricity, gas and water prices, by an average of 9.5 percent in the first eight months. The low import prices, and lower US inflation rate also have their importance. Statistics showed that residential rentals have decelerated since the introduction of the housing demand management measures in October 2012. The cool-off effect on rentals should continue in the second half of 2014 and in 2015 as well. Inflation rate is forecast to stand at 3.8 percent in 2014. The implicit price deflator of GDP is forecast to increase 3.0 and 3.2 percent in 2014 and 2015. The stronger performance in the domestic sector than the external sector will continue to help the performance in the labor market. The unemployment rate is forecast to remain low at around 3.4 percent in 2014 and 2015. III. Concluding Remarks The main negative risk to the outlook of the Hong Kong economy is the external development. A slower than expected economic growth of the Chinese economy, and how soon the US Federal Reserve chooses to increase interest rates can impose significant impact on the economic growth of Hong Kong. Regarding the internal side, in the face of decelerating growth in the number of tourist arrival and the decline in Chinese mainland visitors spending power, the civil disobedience campaign that started on September 28 in Hong Kong is likely to worsen the underlying economic problems than caused new ones. 6
However, if the pro-democracy protest can clear in the coming weeks, the impact on Hong Kong GDP growth should be minimal. APPENDIX Table A Forecast rate of growth in GDP, GDP deflator and CPI in 2014-15 Actual 2013 Forecast 2014 Forecast 2015 Real GDP 2.9 2.4 2.8 Private consumption expenditure 4.3 1.6 3.0 Government consumption expenditure 2.3 2.7 3.0 Gross domestic fixed capital formation 3.3-0.1 1.9 Exports of goods and services 6.4 1.6 2.8 Exports of goods 6.6 1.7 2.0 Exports of services 5.5 1.2 2.1 Imports of goods and services 6.8 1.5 2.5 Imports of goods 7.4 1.4 2.5 Imports of services 2.0 2.7 3.2 GDP deflator 1.4 3.0 3.2 Composite CPI 4.3 3.8 4.2 7