Irina Fan Senior Economist irinafan@hangseng.com Joanne Yim Chief Economist joanneyim@hangseng.com May 11 Hong Kong First Quarter GDP Preview Nearing Full Capacity and a Wary Inflation Outlook The Hong Kong government is set to release its first quarter GDP report on May 13. With exports expanding 1., retail sales value growing 1 and unemployment rate dropping to near a pre-crisis low of 3. in the first quarter, the coming GDP reading is likely to be another above-trend growth of.. Looking ahead, buoyant consumer demand should continue to underpin growth, although export prospect is more uncertain due to Japan s earthquake/tsunami s disruption on the global supply chains, as well as the impacts of persistent surge in crude oil prices on the global economy. The inflation outlook is more worrying, as there are more signs of overheating. The Hong Kong economy may be running close to its full capacity after several straight quarters of above-trend growth. Rising import prices stemming from a weakening currency and expansionary monetary aggregates also reinforced the inflation expectations. Inflation is likely to accelerate in coming months with rising price pressure emerging from all fronts. Exhibit 1: Hong Kong s Economic Forecast () 1Q1 Q1 3Q1 Q1 1Q11 1 11F Real GDP*.1..7..E.. Retail sales value* 1. 1.9 17.9 19. 1. 1.3 1. Total exports*..3 7. 1. 1.. 1. Total imports* 3.3 9.9.1 1.1.7. 1. Consumer prices* 1.9..3....7 Unemployment rate.... 3.. 3. Note: (E) Estimate; (F) Forecast; * year-on-year changes Sources: Hong Kong s Census and Statistics Department, Hang Seng Bank
Another Quarter of Above-Trend Growth The latest economic reports showed that the Hong Kong economy maintained strong growth momentum in the first quarter with the value of total exports expanded 1., retail sales value growing 1 and unemployment rate dropping to near a pre-crisis low of 3.. As such, the local economy is likely to have expanded. in the first quarter, at a similar pace of the previous quarter. If our estimates are correct, it would be the fifth straight quarters of above-trend growth. Exhibit : Real GDP Growth Quarterly (yoy ) Annual (yoy ) 1Q1 Q1 3Q1 Q1 1Q11E 1 11F Private Consumption 7. 3.9.9 7.1.. -- Government Consumption 3.3.7 3.1 1. 3..7 -- Gross Domestic Fixed Capital. 1... 1..1 -- Formation Export of Goods 1..1.. 1. 17.3 -- Export of Services 1.3 17. 1.7 9. 1. 1. -- Import of Goods. 3. 1. 7. 13.3 1.1 -- Import of Services 11. 13.1 11. 7. 7. 1.9 -- Real GDP.1..7.... Note: (E) estimate; (F) forecast Source: Census and Statistics Department, Hang Seng Bank Exhibit 3 Exhibit Hong Kong Real GDP yoy 1 1 1 - - - - -1 91 93 9 97 99 1 3 7 9 11e Real GDP Note: "e" estimate 1 year average 1 1 1 yoy - - - - -1 1 1 - -1-1 - Domestic and External Demand -1-1 - - - e 91 93 9 97 99 1 3 7 9 11 Domestic demand Note: "e" estimate External demand 1 1 -
Contribution to Growth Larger contribution from net exports The contribution of net exports of goods and services is estimated to be 3.9 percentage points in the first quarter, slightly more than the.9 percentage points in the previous one, reflecting stronger exports relatively to imports. Exhibit Exhibit Hong Kong Trade yoy 3 3 1 1 - -1-1 - - 91 93 9 97 99 1 3 7 9 11 3 3 1 1 - -1-1 - - yoy Value of imports Value of exports Index 3 Hong Kong Exports 3 91 93 9 97 99 1 3 7 9 11 US ISM Manfacturing Index HK total exports 3 1-1 - -3 yoy Exhibit 7: Contribution to Growth (percentage points) 1Q1 Q1 3Q1 Q1 1Q11E 1 11F Private consumption.. 3.. 3. 3. -- Government spending.3..3.1.3. -- Investment 1.7 3.1. 1.. 1. -- Inventories..7 -. -.9 -. 1. -- Domestic demand 1.9 1.7-1.7 3.3.1. Exports of goods & services 37. 39.3 39.7 17.. 33. Imports of goods & services 3. 3. 31.3 1.. 3. Net exports of goods & services -. -...9 3.9.3 -- Real GDP.1..7.... Source: Hang Seng Bank Consumption demand remains a key driver Consumption spending stayed robust on the back of rising income and brighter job prospects. The unemployment rate dropped to a pre-crisis low of 3. in the first quarter. Wealth effects from rising asset prices may have also played a role. It is estimated that consumption could have contributed 3. percentage points to the first quarter growth. 3
Exhibit Exhibit 9 yoy 1 1 - -1-1 - Consumption and Hang Seng Index 1 3 7 9 1 11 7 3 1-1 -3 - -7 yoy Nominal consumption spending Hang Seng Index 7. 7....... 3. 3.. Unemployment and Wage 7 9 1 11 Unemployment rate Nominal wage -3 - -1 1 3 yoy Investment spending was also strong, boosted by the ongoing government infrastructure spending. Nevertheless, the latest survey indicated that business confidence eased and property-related investment might be less buoyant after a slew of government measures to cool the property market. Although investment spending could have contributed positively to GDP growth, the slower accumulation of stocks is likely to go on, as companies see more challenges ahead. It is estimated that the lower inventory level might have knocked. percentage points from growth. Overall, domestic demand is estimated to have contributed.1 percentage points to growth in the first quarter. Exhibit 1 Exhibit 11 Business Confidence and Grosss Fixed Capital Formation Investment Spending 1 9 1 1 - -1-1 - 7 9 1 11 Real GFCF Business confidence - - - HKD bn 7 3 1 97 9 99 1 3 7 9 1 Others investment spendings Public construction Private construction
More Cautious about the Future Looking ahead, the optimism seems to be giving way to a more cautious outlook. While consumers remain confident about the prospects of the economy, business has turned more cautious and the export outlook is more uncertain, as the adverse impacts of Japan s earthquake disaster on global supply chains has yet to be reflected. The Japanese government raised the severity of the nuclear crisis to the highest level and power shortage may go on for months, affecting the global supply chains, which does not bode well for exporters and traders. Moreover, persistent surge in crude oil prices could dampen the global recovery, posting a major risk to growth. The International Monetary Fund warned about rising oil prices and cut its growth forecast of the US. Although exports grew strongly by.7 in the first three months, we believe export growth is likely to slow significantly in coming months to give a full year average of 1 and see risk to the downside. A Wary Inflation Outlook While uncertainties remain, the rising price pressure is of increasing concern. In the first three months, consumer prices rose on the back of rising housing rentals, soaring oil and food prices, reflecting strong demand at home and the effects of a weaker currency. The inflation reading was the highest since the third quarter of. Wage growth also picked up and might soon feed-through to a broader base, as the economy is running near its full capacity after several straight quarters of above-trend growth. Exhibit 1 Exhibit 13 Domestic Demand and Consumer Prices GDP and CPI 3 1 1 1 1 1 1 1 1 - - - - -1 - - -1 - - - - -1 91 93 9 97 99 1 3 7 9 11 91 93 9 97 99 1 3 7 9 11 yoy yoy yoy 1 1 1 - - - - -1 yoy CPI Domestic demand (nominal) Source: CEIC, Hang Seng Bank CPI Real GDP Source: CEIC, Hang Seng Bank
The expansionary monetary aggregates also worked to stimulate aggregate demand. Hong Kong has experienced strong inflows of capital amidst Fed s ultraloose monetary stance after the global financial crisis. Between Q and 1Q 1, the aggregate banking balance and value of outstanding Exchange Fund paper increased by over HKD billion, equivalent to about 37 of nominal GDP in 1. The aggregate banking balance and value of outstanding Exchange Fund paper have stayed at high level of around HKD billion since then. Exhibit 1 Exhibit 1 HKD billion Banking Aggregate Balance & Outstanding Exchange Funds Paper 9 7 3 1 99 1 3 7 9 1 11 Outstanding exchange fund bills and notes Banking aggregate balance yoy Money Supply and Consumer Prices 3 3 1 1 - -1 91 93 9 97 99 1 3 7 9 11 1 1 1 - - - - yoy HKD M3 M3 CPI Exhibit 1 Exhibit 17 Loan-to-Deposit Ratio 7 9 1 Interest Rates 1 9 1 1 7 7 1 1 3 7 9 1 11 Loan-to-deposit ratio HKD loan-to-deposit ratio 91 93 9 97 99 1 3 7 9 11 3M HIBOR 3M LIBOR
Liquidity in the banking sector has translated into low interest rates and rapid credit creation. Loan demand has been rising sharply since the third quarter of 9 amidst an economic recovery. Between September 9 and March 1, the total loan-todeposit ratio jumped from 1. in to a nearly nine year high of. and the Hong Kong dollar loan-to-deposit ratio also surged from 7. to 1.7 during the same period. The Fed indicated no rush to change its ultra-loose monetary stance in its April policy meeting, reinforcing expectation of a prolonged inflationary environment. Economic Forecast The Hong Kong economy has maintained a strong growth momentum so far. External demand remains cloudy but buoyant consumer demand should continue to underpin growth. As such, we still see a decent growth of. for 11. The inflation outlook is more worrying, as there are more signs of overheating. 7
3 Hong Kong Retail Sales Volume 3 1 1-1 -1 - - -3 9 1-3 yoy change Sources: Reuters EcoWin, Hang Seng Bank Hong Kong's Consumer Price Inflation 1 1 1 1 - - -1 9 1-1 Food Prices, excluding meals bought away from home Consumer Prices Sources: Reuters EcoWin, Hang Seng Bank
Hong Kong Money Supply 3 1 1 - -1-1 9 1 3 1 1 - -1-1 Hong Kong Total Loans and Deposits 3 1-1 - 9 1 3 1-1 - Total M3 (3MMA) HKD M3 (3MMA) Sources: Reuters EcoWin, Hang Seng Bank Total loans (3MMA) Total deposits (3MMA) Sources: Reuters EcoWin, Hang Seng Bank 1. 1... -. -1. -1. Exchange Rate and HIBOR-LIBOR Spread 7.3 7. 7.1 7. 7.79 7.7 7.77 -. 7.7 -. 7.7-3. 7.7 7 9 1 11 USD/HKD USD/HKD 3M HIBOR-LIBOR spread Sources: Reuters EcoWin, Hang Seng Bank Index 17 1 1 1 7 Hong Kong Property Prices 17 1 1 1 93 9 97 99 1 3 7 9 11 Private domestic, -9.9 sq.m Private domestic, 1 sq.m or above 7 Index yoy 3 3 1 1 - -1-1 - - -3-3 Hong Kong Office and Retail Rentals 3 3 1 1-93 9 97 99 1 3 7 9 11 Office rentals Retail rentals -1-1 - - -3-3 yoy 9
Hong Kong Economic Monitor Statistics May 11 GDP (real) yoy() yoy() yoy() HKD bn yoy() HKD bn yoy() yoy() yoy() 1. -.1 -. 3,31 -.,7 -. -.9-3. 7.3 3 3. -. -. 3,7 7.,3 -..3 -. 7.9. 1. 9. 3,.,1.9. -.. 7.1..1,.,31 7.3. 1.. 7. 7..7,77 17.,.7 1... 7. 1. 1.1,9 3.,9.....3 1.., 3. 3, 1.9..3 3. 9 -.7. -.,31.3 3,9.1... 1. 1.3 1., 7.,7.... 11F. 1. 1. 7, 9.,777 13. 9..7 3. Q 9. 1. 9.9,31.3 3,.1. 1.3.9 Q1 1.1 1. 1.,371. 3,9 9..7 1.9. Q. 1.9 13.,3 1. 3,773 17. 1.3.. Q3.7 17.9 1.,73.9,1.9..3. Q. 19. 17., 7.,7.... Q1 11 NA 1. 1.3 7,73 11.,39 3.9 11.7. 3. Nov 1 NA 1.1 1.,7.,1.9..9.1 Dec NA 1. 1., 7.,7.. 3.1. Jan 11 NA.1 3.,9 9.9,3 9.9 1. 3. 3. Feb NA..,9 9.7,1 9. 1.1 3.7 3. Mar NA.. 7,73 11.,39 3.9 11.7. 3. YTD NA 1. 1.3 7,73 11.,39 3.9 11.7. 3. Exports Retail sales (value) Retail sales (volume) Foreign Trade Imports Total Deposits Trade Residential Property Price Index Total Loans Office Rental Index Money supply (Total M3) Tourist Arrivals Consumer prices Unemployment rate (s.a.) HKD per USD (end of period) balance HK$bn yoy() HK$bn yoy() HK$bn yoy() yoy() ' yoy() 1,1. 1,19 3.3 -.9-11.1-1. 1,.7 7.79 3 1,7 11.7 1, 11. -3.3-1. -1.7 1,37 -. 7.73,19 1.9,111 1.9-9..7. 1,11. 7.773, 11.,33 1.3-79.3 1. 3. 3,39 7.1 7.7,1 9., 11. -13..7 1.,1.1 7.77 7, 9., 1.3-1. 11. 1.1,19 11. 7.1,.1 3,. -1.1 1. 17.9 9,.7 7.7 9,9-1.,9-11. -3.3. -1. 9,9.3 7.7 1 3,31. 3,3. -333..3.9 3,3 1. 7.77 11F 3, 1. 3,7 1. -3. 1. 11. 39,33 1. 7. Q 9 9 -. 77 3. -73. 3.1-13.,3 9. 7.7 Q1 1 3. 7 3.3 -. 3.3-1., 1. 7.7 Q 73.3 9.9-9.9.1 1.,31 3. 7.7 Q3 3 7. 9.1 -.9 1. 13.3 9,3.9 7.71 Q 9 1. 1.1-9.3.1 13. 9,7 17.1 7.77 Q1 11 793. 7. -1. 3. 1. 9,7 1. 7.7 Nov 1 73 1. 97 1. -3. 3.7 13.7 3, 17.1 7.7 Dec 3 1. 97 1. -3. 1. 1. 3,3 1.7 7.77 Jan 11 7. 3 19. -1..1 1. 3,9 1. 7.79 Feb.9 3. -.. 1.7,93. 7.991 Mar 1 1. 3 1. -.1 3. 1. 3,17 13.9 7.7 YTD 793. 7. -1. 3. 1. 9,7 1. 7.7 Note: (F) Forecast Source: CEIC, Hang Seng Bank 1
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