ECONOMIC PROSPECTS FOR HONG KONG IN 2016-17 Win Lin Chou, ACE Centre for Business and Economic Research, Hong Kong I. The Current Trends Real gross domestic product (GDP) in Hong Kong increased 1.7 percent in the second quarter of 2016, following an increase of 0.8 percent in the first quarter 1. The acceleration in GDP growth in the second quarter primarily reflected positive contributions from private consumption expenditure, government consumption, inventory investment and total exports that were partly offset by a negative contribution from gross fixed capital formation. Total imports (comprising imports of goods and services), are a subtraction in the computation of GDP, showed a pickup of 0.3 percent in the second quarter after decreasing 4.3 per cent in the first quarter. Private consumption expenditure decelerated to 0.6 percent in the second quarter from a 1.2 percent increase in the first quarter. This deceleration in consumer spending in the second quarter reflected declines in both goods and services spending. And the decrease in goods spending primarily reflected a marked contraction of 18.2 percent in consumer durables. Consumer spending contributed 0.4 percentage points to the real GDP growth in the second quarter of 2016. Gross domestic fixed capital formation decreased 4.9 percent in the second quarter, contributing -1.2 percentage points to the change in real GDP. The second-quarter decline in gross fixed investment primarily reflected a 6-percent decrease in fixed investment in the private sector, with a 13.1 percent drop in private investment in machinery, equipment and intellectual property products. Despite the weak external demand, there is a pickup of 2.0 percent in exports of goods, and an improved performance in the exports of services in the second quarter, resulting in an increase of 0.6 percent in total exports of goods and services, after decreasing 3.9 percent in the first quarter. Total exports (of goods and services) contributed 1.2 percentage points to the growth of real GDP. The 1 Rates of change, unless otherwise specified, are year-on-year rates in real terms.
pickup in total imports in the second quarter by 1.3 percent reflected a pickup in imports of goods (by 0.2 percent) and a pickup of 1.1 percent in imports of services. Total imports contributed -0.7 percentage points to change in real GDP in the second quarter. Subtracting total imports from total exports, the net exports (of goods and services) contributed 0.5 percentage points to changes in real GDP in the second quarter. Overall, the 1.7 percent GDP growth in the second quarter of 2016 comes from the domestic sector with inventory investment being the largest contributor, contributing 1.6 percentage points to real GDP growth. In the external sector, exports of goods compiled under the GDP accounting system, showed a pickup of 2.0 percent in real terms in the second quarter of 2016 from -3.6 percent in the first quarter. Similarly, merchandise exports recorded a pickup of 1.4 percent in real terms in the second quarter after decreasing 4.2 percent in the first quarter. This pickup largely reflected improved demand conditions in Hong Kong s major markets, except the Japanese market. Total merchandise exports increased 1.4 percent in real terms in the second quarter. Analyzed by major markets, merchandise exports to Chinese mainland (the Mainland hereafter) reverted to a positive growth of 2.0 percent in real terms in the second quarter of 2016 after contracting 5.6 percent in the first quarter. Those to the United States showed a narrower year-on-year rate of decline in the second quarter, decreasing 1.4 percent in real terms in the second quarter, after dropping 4.8 percent in the first quarter. Total exports to European Union (EU), and to Asian economies such as Korea, and Taiwan reverted to a positive growth in real terms in the second quarter. We saw acceleration in total exports to the EU accelerated in the second quarter, reverting to a positive 3.8 percent real growth after decreasing 2.6 decrease in the first quarter. Re-exports, which accounted for 2
98.8 percent of total merchandise exports by value, increased 1.6 percent in real terms in the second quarter, after decreasing 4.0 percent in the first quarter. While the year-on-year rate of change in total exports of goods reverted to a positive growth of 1.4 percent in the second quarter of 2016 from -4.2 percent in the first quarter, Hong Kong s services exports continued their downward trend in the second quarter. They decreased 4.6 percent in real terms in the second quarter, after decreasing 5 percent in the first quarter. The decline primarily reflected a sharp decrease of 8.7 percent in the second quarter in other services which measure a variety of services including financial services, insurance services, business and professional services. Performance in exports of travel services has been weak since the second quarter of 2014. Exports of travel services declined 9.7 percent in the second quarter following a 13.9 percent drop in the first quarter. The weak travel services reflected a slowdown in tourist arrivals 2 in the first six months of 2016, and a slowdown in per capita spending by Chinese visitors in Hong Kong in response to a crackdown on corruption in the Mainland. Merchandise imports decreased 0.5 percent in real terms in the second quarter, compared to a 5.4 percent decline in the preceding quarter. Within the total merchandise imports, retained imports decreased 6.0 percent in the second quarter after decreasing 8.9 percent in the first quarter. Performance the domestic demand sector also showed improvement in the second quarter of 2016, increasing 1.2 percent in real terms in the second quarter after recording a zero growth in the first quarter. Even though real GDP increased 1.2 percent in the first six months of 2016, the unemployment rate (seasonally adjusted) has stayed at 3.4 percent in the first six months. In fact, the unemployment rate has persistently stayed between 3.2 2 Total tourist arrivals decreased 6.0 percent in the first seven months of 2016. Mainland Chinese visitors, which accounted for 76 percent of the total, shrank 5.4 percent in the second quarter after decreasing 15.1 percent in the first quarter. 3
percent and 3.4 percent since 2011 while real GDP growth has fluctuated between 1.7 percent and 4.8 percent, suggesting Hong Kong s GDP growth can no longer serves as a good predictor for the unemployment rate in recent five years. This is mainly due to the fact that the demand for Hong Kong s labor comes from both local demand and a more significant derived demand from the Chinese mainland. Analyzed by major economic sector, during the second quarter, unemployment rates (not seasonally adjusted) increased in all sectors to 3.5 percent from 3.3 percent of the first quarter. Affected by the sharp decline (-8.8 percent in the first seven months) in the mainland Chinese visitors, retail, accommodation and food services recorded the highest unemployment rate at 5.1 percent and 5.4 percent, in the first and second quarter, respectively. Prices of goods and services purchased by Hong Kong residents, as measured by the GDP price deflator, decelerated to 2.0 percent in the second quarter of 2016 from 2.3 percent of the first quarter. Within the GDP deflator, the price deflator of domestic demand increased 1.4 percent in both first and second quarter, while the trade-related price deflators continued to decrease in the second quarter. The Composite CPI inflation eased from 2.8 percent in the first quarter to 2.6 percent in the second quarter, primarily reflecting the moderation in food, prices of electricity, gas and water, and miscellaneous services. II. Forecast Summary for 2016-17 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 2.0 percent in real terms in the second quarter of 2016 after 4
contracting 5.6 percent in the first quarter, suggesting improved demand for Hong Kong s total exports. Real GDP increased 6.7 percent in both the first and second quarter of 2016, after growing at 6.9 percent in 2015. We expect China s real GDP to increase 6.7 percent in 2016 as a whole and have assumed it will increase at the same rate in 2017. As regards Hong Kong s second largest trading partner, the United States, we saw the US real GDP grew 1.2 percent in the second quarter of 2016, following a 0.8 percent growth in the first quarter. We expect the pace of recovery in the US economy to accelerate in the second half of 2016. Real GDP in our model is assumed to increase 2.6 percent and 2.5 percent in 2016 and 2017, respectively. Regarding the Euro area, the recovery remains slow and fragile. The quarterly GDP figures released by the statistical office of the European Union (28 countries) showed the GDP in the Euro area grew only 0.4 percent in real terms during the second quarter of 2016, after increasing 0.5 percent in the first quarter. The German economy slowed down in the second quarter, increasing 0.4 percent after experiencing 0.7 percent in the preceding quarter. The recovery in other European countries is slow as well. Real GDP of the United Kingdom (U.K.) fell to zero in the second quarter, after increasing 0.4 percent in the first quarter. Since the UK only accounted for 1.5% of Hong Kong's total merchandise exports in 2015, and 6.6% of Hong Kong's total exports of services. Hence, the direct impacts from Brexit through the trade channel is unlikely to be large. However, the possible impacts of Brexit on the Hong Kong economy through the financial channel may be significant, but are difficult to assess. Additionally, improvements in Hong Kong s merchandise exports to Asian economies such as India, Korea, and Taiwan in the second quarter of 2016 suggesting the 5
economic conditions in the developing Asian economies, are improving. We expect such improvements to continue in the second half of 2016 and in 2017. Given the above conditions, our forecast indicates the total exports of goods will grow moderately at 0.5 percent and 1.3 percent, respectively, in 2016 and 2017. During the first seven months of 2016, overall inbound tourism decreased 6.0 percent with that from China falling 8.8 percent. We have expected the inbound tourism to decrease 6.8 percent in 2016 as a whole, and to decrease 6.5 percent in 2017. In view of this, the declining trend in exports of travel services is likely to continue in the second half of 2016. This decrease together with downturns in exports of transportation services, and in exports of finance and business services will result in negative growth in exports of services by 2.9 percent in 2016, and 2.6 percent in 2017. In line with the slowdown in private consumption in the second quarter of 2016, we expect private consumption to increase 1.1 percent in real terms in 2016, and 2.2 percent in 2017. Total fixed investment spending had a decrease of 4.9 percent in the second quarter, after a sharp decrease of 10.1 percent in the first quarter. Improvement is expected to continue in the second half of 2016. The total fixed investment is forecast to decrease 3.4 percent in 2016, and to decrease further by 1.1 percent in 2017. The government spending is assumed to increase 3.4 in 2016 and 2017, respectively. All the external and internal conditions suggest the real GDP growth is forecast to be 1.4 percent in real terms in 2016, and 1.6 percent in 2017. (See Table 1 in Appendix for details). In the first six months of 2016, the Composite CPI inflation rate stood at 2.7 percent. The increase in rentals on private and public housing, by an average of 4.3 percent in the first 6
half, was one of the main forces lifting inflation rate. Wage inflation rate also has its importance, and contributed to the 2.7 percent inflation in the first half of 2016. 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 2016 and in 2017 as well. Inflation rate is forecast to stand at 2.7 percent in 2016. The implicit price deflator of GDP is forecast to increase 2.2 and 2.0 percent in 2016 and 2017. 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 2016 and 3.3 percent in 2017. 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 important impacts on the economic growth of Hong Kong. Regarding the internal side, facing decelerating growth in the number of tourist arrival and the decline in Chinese mainland visitors spending power, the Chief Executive Mr. CY Leung has stressed his 2016 policy address that Hong Kong should not just focus on the growth in tourist numbers, it is important to move towards diversified and high value-added tourism services. 7
APPENDIX Table 1 Forecast real rate of growth in GDP, GDP deflator and CPI in 2016-17 Actual 2015 Forecast 2016 Forecast 2017 Real GDP 2.4 1.4 1.6 Private consumption expenditure 4.7 1.1 2.2 Government consumption expenditure 3.4 3.4 3.4 Gross domestic fixed capital formation -2.0-3.4-1.1 Exports of goods and services -1.5-0.2 0.5 Exports of goods -1.9 0.5 1.3 Exports of services -0.2-2.9-2.6 Imports of goods and services -1.5-0.3 0.6 Imports of goods -2.7-0.6 0.4 Imports of services 5.7 2.2 2.4 GDP deflator 3.6 2.2 2.0 Composite CPI 3.0 2.7 2.7 8