ECONOMIC PROSPECTS FOR HONG KONG IN 2015-16 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 2.8 percent in the second quarter of 2015, after increasing 2.4 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, and gross fixed investment that were partly offset by a negative contribution from inventory investment. Total imports (comprising imports of goods and services), are a subtraction in the computation of GDP, decreased 2.5 percent in the second quarter following a marginal increase of 0.7 per cent in the first quarter. Private consumption expenditure accelerated to 6.0 percent in the second quarter from an increase of 5.3 percent in the first quarter. This acceleration in consumer spending reflected pickups in spending in both goods and services. The pickup in goods primarily reflected a large pickup in consumer durables. Consumer spending contributed 4.2 percentage points to the real GDP growth in the second quarter. Gross domestic fixed capital formation increased 6.5 percent in the second quarter, contributing 1.6 percentage points to the change in real GDP. The sharp rise in gross fixed investment in the second quarter primarily reflected a significant upturn in fixed investment in the public sector, with a slowdown in fixed investment in the private sector. There is a downturn of 3.6 percent in exports of goods, and a pickup in the exports of services in the second quarter, resulting in a decrease of 2.7 percent in total exports of goods and services, after rising 0.3 percent in the first quarter. Exports (of goods and services) contributed -6.2 percentage points to the growth of real GDP. The downturn in total imports in the second quarter by 2.5 percent reflected a downturn in imports of goods and a slowdown in imports of services. Total imports contributed 5.8 1 The rates of change, unless otherwise specified, are year-on-year rates in real terms.
percentage points to growth in real GDP in the second quarter. Net exports of goods and services contributed -0.4 percentage points to changes in real GDP in the second quarter. Overall, the GDP growth in the second quarter of 2015 comes from the domestic sector with consumer spending being the largest contributor, contributing 4.2 percentage points to real GDP growth. In the external sector, exports of goods compiled under the GDP accounting system, turned down from 0.4 percent in real terms in the first quarter to -3.6 percent in the second quarter. Merchandise exports showed a downturn of 3.0 percent in real terms in the second quarter after increasing 0.7 percent in the first quarter. This downturn largely reflected weak demand conditions in Hong Kong s major markets, with the exception of the US market. Excluding the sharp decline in exports of non-monetary gold, total merchandise exports decreased 3.0 percent in real terms in the second quarter. Analyzed by major markets, merchandise exports to Chinese mainland (the Mainland hereafter) continued to decelerate to 4.4 percent in real terms in the second quarter after a downturn of 0.2 percent in the first quarter. Additionally, those to European Union, Japan, and Asian economies such as Korea, Singapore, Taiwan, and India recorded downturns. The pickup in exports to the United States continued in the second quarter by 3.6 percent in real terms following an increase of 3.3 percent in the first quarter. Exports to the EU decelerated in the second quarter, decreasing 6.7 percent after a 3.5 percent increase in the first quarter. With a share of 98.2 percent in the merchandise exports by value, re-exports are the key driver in Hong Kong s total exports. They decreased 3.1 percent in real terms in the second quarter, reflecting a significant reverse from the slight expansion of 0.8 percent in the first quarter. 2
In contrast to the downturn in the exports of goods in the second quarter, Hong Kong s service exports are better. They increased 1.0 per cent in the second quarter of 2015, after a zero growth in the first quarter. The pickup primarily reflected a sharp increase of 11.0 percent in the second quarter in other services which measure a variety of services including financial services, insurance services, business and professional services. Growth in exports of travel services has turned negative since the second quarter of 2014. Exports of travel services declined 1.5 percent in the second quarter of 2015 after decreasing 4.4 percent in the first quarter. The weak travel services reflected a slowdown in tourist arrivals 2 in the first six months of 2015, 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 3.1 percent in the second quarter, a downturn from an increase of 1.1 percent in the preceding quarter. Within the total merchandise imports, the growth in retained imports turned negative in the second quarter. It was -3.9 percent in the second quarter after increasing 1.9 percent in the first quarter. This downturn largely reflected continued sluggish import demand for consumer goods (-11.2%), foodstuffs (- 11.0%), and raw materials and semi-manufactures (-14.3%) in the second quarter. Compared to the external sector, the domestic demand sector performed better in the first six months of 2015. It grew 3.0 percent in the second quarter after increasing 3.2 percent in the first quarter. This relatively strong domestic demand reflected in the demand for labor which remained tight, as indicated by low unemployment rates. The unemployment rate (seasonally adjusted) was 3.2 percent in the second quarter of 2015, slightly lower than the 3.3 percent of the preceding quarter. Analyzed by major economic 2 Total tourist arrivals increased 2.8 percent in the first six months of 2015. Mainland Chinese visitors, which accounted for 76 percent of the total, decelerated to 1.4 percent in the second quarter after increasing 7.7 percent in the first quarter. 3
sector, the unemployment rates (not seasonally adjusted) declined in four sectors which include retail; transportation, storage, postal and courier services; finance and insurance; and construction during the second quarter when compared to the previous quarter. The overall unemployment rate (not seasonally adjusted) is 3.3 percent in the second quarter, slightly higher than the 3.2 percent of the first quarter. Prices of goods and services purchased by Hong Kong residents, as measured by the GDP price deflator, accelerated to 4.7 percent in the second quarter of 2015 from 4.4 percent recorded in the first quarter. As price deflators of most of the major GDP components decelerated, the acceleration in the second quarter reflected acceleration in the price deflator of consumer spending. Besides, the further deceleration in the price deflator of imports of goods by -0.8 percent after decreasing 0.1 percent in the first quarter also contributed to the acceleration in GDP price deflator. While the GDP deflator accelerated in the second quarter, the Composite CPI inflation shows an easing trend. The headline inflation (based on Composite CPI which includes all the effects of Hong Kong government s one-off relief measures 3 ) moderated from 4.4 percent recorded in the first quarter to 3.0 percent in the second quarter, mainly reflecting the price moderation in the all major components of Composite CPI. When netting out the effect of government s one-off relief measures, the resulting Composite CPI inflation, called underlying Composite CPI inflation, decelerated from 2.7 percent in the first quarter to 2.5 percent in the second quarter. Statistics available up to August indicated that the headline Composite CPI inflation decelerated further to 2.5 and 2.4 percent, respectively, in July and August. 3 The one-off relief measures include electricity charge subsidy, waiver of public housing rentals, and rates concession, etc.. 4
II. Forecast Summary for 2015-16 The main negative risk to the outlook of the Hong Kong economy is the external development. A slower 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 economy of Hong Kong is forecast to be driven by domestic demand in the near term and the year to come. A number of assumptions on the growth of these major markets have been adopted when making our forecasts. The economy of China slowed down in the first half of 2015. China s real GDP increased 7.0 percent in both the first six months of 2015, after growing at 7.3 percent in 2014. Its exports decreased 1.5 percent in value terms in the first eight months of 2015 after increasing 6.1 percent in 2014. All these slowdowns are expected to continue in the second half of 2015 and in 2016 as well. China s real GDP is expected to decelerate to 6.9 percent in 2015 as a whole and then to increase at a slightly lower rate of 6.8 percent in 2016. Growth in the United States and the United Kingdom were back on track in the second quarter of 2015 with growth at an annualized rate of 2.3 and 2.6 percent, respectively, and is expected to remain solid for the rest of 2015 and 2016. Regarding the Euro area, the modest recovery in the Euro area is forecast to continue this year and the next. Our forecast indicates the total exports of goods will decrease 0.1 percent in 2015, and should recover modestly in 2016 with a growth of 0.1 percent. Latest statistics on tourist arrivals indicated 5
that the inbound tourism decreased 0.1 percent during the first eight months of 2015 with visitors from the Mainland growing at a modest rate of 0.8 percent. We have expected the inbound tourism to increase at a rate of 1.9 percent in 2015 as a whole, and 2.9 percent in 2016. However, with the Mainland market remains to be weak in 2015 in the near term, our forecast on total tourist arrivals for 2015 may now look a bit optimistic. The decline of exports of travel services are forecast to continue in the second half of 2015 and 2016. Despite of this downturn, there is a strong pickup of 11.0 percent in the second quarter in other services including financial services, insurance services, business and professional services. Overall, we expect a modest increase in exports of services by 0.8 percent in 2015, and 1.1 percent in 2016. In line with the acceleration in private consumption in the first six months of 2015, we expect consumer spending to increase 5.7 percent in 2015, and 5.8 percent in 2016. Total fixed investment spending had a sharp pickup of 7.0 percent in the first half of 2015, after a downturn of 0.2 percent in 2014. This pickup is expected to continue, and the total fixed investment is forecast to grow at a solid rate of 6.4 percent in 2015, and at 3.5 percent in 2016. The government spending is assumed to increase 3.4 percent in 2015 and 2016, respectively. These conditions suggest the economic growth will remain modest in 2015, and the driving force of the economic growth should come from the domestic sector rather than the trade sector. Real GDP growth is forecast to be 2.2 percent in 2015, and 2.6 percent in 2016. (See Table A in Appendix for details). Our estimates show that consumer spending, domestic fixed investment, and government spending will be the major contributors to the GDP growth in 2015 and 2016. In the first eight months of 2015, the Composite CPI inflation rate stood at 3.7 percent. The increase in rentals on private and public housing, by an average of 5.1 6
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 2015 and in 2016 as well. Inflation rate (measured by the headline Composite CPI) is forecast to stand at 3.5 percent in 2015. The implicit price deflator of GDP is forecast to increase 4.8 and 4.4 percent in 2015 and 2016. The stronger performance in the domestic sector than the external sector will continue to help the performance in the labor market. The unemployment rate (not seasonally adjusted) is forecast to remain low at around 3.3 percent in 2015 and 2016. III. Policy Issues Tourism (including both inbound and outbound tourism) is one of the four pillar industries in Hong Kong, along with financial services, trading and logistics, as well as professional and producer services. According to Hong Kong Census and Statistics Department, tourism contributed 5.0 percent of GDP and 7.2 percent of total employment in 2013. The sharp deceleration in inbound tourism in the first eight months of 2015 reflects the over-reliance on Chinese Mainland visitors (which constituted 76 percent of the total) and underscores the need for Hong Kong to diversify its source of tourism. New measures are needed to attract new visitors, encourage repeated visits of returning visitors, and lengthen their stays. Additionally, effective measures are needed to attract higher value-added visitors and open up new visitor sources. 7
After having had many rounds of discussions with the banking industry and Mainland authorities on relaxing the restrictions on RMB currency conversions by Hong Kong residents, the Hong Kong Monetary Authority (HKMA) announced on November 12, 2014 that the RMB conversion limit for Hong Kong residents of RMB20,000 per day will no longer be applicable with effect from November 17 2014. The removal of the conversion limit will become more convenient for Hong Kong residents to participate in Shanghai-Hong Kong Stock Connect and other RMB financial transactions. With the size of the offshore RMB liquidity pool in Hong Kong exceeding RMB 1 trillion, and considering the scale and depth of the RMB foreign exchange market, the HKMA do not expect any problem for banks to square their positions for Hong Kong residents RMB conversions in the offshore market. APPENDIX Table A Forecast rate of growth in GDP, GDP deflator and CPI in 2015-16 Actual 2014 Forecast 2015 Forecast 2016 Real GDP 2.5 2.2 2.6 Private consumption expenditure 3.2 5.7 5.8 Government consumption expenditure 3.0 3.4 3.4 Gross domestic fixed capital formation -0.2 6.4 3.5 Exports of goods and services 0.8-0.1 0.1 Exports of goods 0.8-0.3-0.2 Exports of services 2.4 0.8 1.1 Imports of goods and services 1.0 0.9 1.5 Imports of goods 0.9 0.5 1.0 Imports of services 1.9 5.4 5.7 GDP deflator 2.9 4.8 4.4 Composite CPI 4.4 3.5 3.2 8