HK economy cools in Q2 while trade, property risks mount

13-Aug-2018 Intellasia | Reuters | 6:02 AM Print This Post

Hong Kong’s economic growth slowed in the second quarter after a strong start to the year and is expected to cool further as escalating trade tensions between Beijing and Washington and higher interest rates start to bite.

The city’s economy grew 3.5 percent in the second quarter from a year earlier, down from a revised 4.6 percent growth rate in January-March, which was the strongest quarterly performance in nearly seven years.

“Local investor sentiment might feel the pinch should the US-mainland trade conflicts intensify further,” the government said in a statement.

“Indeed, various surveys suggested that local business sentiment had turned slightly more cautious most recently.”

The second-quarter pace lagged an average forecast from four economists of 4.2 percent. However, the government kept its forecast for full-year 2018 growth at 3-4 percent.

The economy contracted 0.2 percent in the second quarter on a seasonally-adjusted basisthe worst reading in four yearscompared with revised 2.1 percent growth in the first quarter.

“With such a big discrepancy between the forecast and actual number, it is a wake-up call,” said Linus Yip, chief strategist at First Shanghai Securities.

“People will take a more cautious approach and that may underpin stock market sentiment.”


The financial hub’s trade-reliant economy is vulnerable to the growing trade row between the United States and China, Hong Kong’s largest trade partner. Trade and logistics industries are particularly at risk as the two sides ratchet up tit-for-tat tariffs.

The Hong Kong government said in July that HK$130 billion ($16.56 billion) worth of trade could be affected by the dispute, accounting for 3.5 percent of the Chinese-ruled city’s total exports.

While uncertainty over trade is clouding the outlook, Hong Kong is still bolstered by strong consumer spending amid a tight labour market and solid growth in tourism, in particular from mainland China.

Hong Kong has hovered near full employment with a jobless rate of 2.8 percent in April-June, the lowest level in two decades.

“Domestic demand should remain largely resilient in the remainder of the year. Consumer sentiment may turn less sanguine in the wake of the increased external uncertainties, but should still be supported by favourable job and income conditions,” the government said.

As one of the most open and free economies in the world, Hong Kong’s growth is highly reliant on capital, trade, tourist and investment flows from China.

Total exports of goods grew 4.6 percent in real terms in the second quarter over a year earlier, after growth of 5.2 percent in the first quarter.

The red-hot property sector, however, is also a potential risk, with the city’s top banks set to raise mortgage rates on Monday.

Deputy government Economist Adolph Leung said if the United States continues to raise interest rates, capital flows to Hong Kong could reverse course and put pressure on asset prices.

“We expect interest rates in Hong Kong to rise further over the months ahead as the US Fed looks set to continue its tightening cycle. This will weigh on capital spending and private consumption,” ING said in a research report.

“A bigger concern is that tighter monetary conditions will put the city’s overvalued property market under strain.”

Nomura said in a research note it expects GDP growth to slow sharply to 2.3 percent in 2019 from 4.0 percent in 2018, due mainly to weaker private consumption.


Category: Hong Kong

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