Hong Kong: Bright outlook but threatened by uncertain international environment

Hong Kong economy ended 2017 on a positive note by expanding 3.4% in the fourth quarter and 3.8% for the whole year. Private consumption grew vibrantly by 6.3% YoY for the second consecutive quarter, underpinned by the tight labour market that has stayed close to full employment and increasing real wage level (2.1% YoY). Investment in terms of gross domestic fixed capital formation, also recovered to growing 4.7% YoY from negative territory in the preceding quarter (-1.3% YoY), thanks to improved business sentiment. Investment is poised for further growth in 2018, supported by the government’s increased spending (3.1% YoY). In addition to the strong output growth, the unemployment rate reached a historic low of 2.9% and inflation also eased further to 1.7% for the sixth consecutive year.

As regards trade, the global upturn has helped exports to record notable growth in the fourth quarter but export growth did not kick a great start in January 2018. The import tariffs announced by the Trump administration in 2018 also stirred up fears of trade wars. Hence, although external demand should remain robust, escalated trade frictions and less favourable base effect lead us to expect slower growth rates for the external sector.

The residential property market continued to be heated as showed by both the price levels and trading activities. The overall price level has risen 15% in 2017 alone and 6800 more transactions of residential property took place compared to 2016. Although the budget has outlined an increase in new residential unit supply, which will finally exceed the increase in the number of households needing housing, but it should not be sufficient to improve the supply pattern given that the actual completion is usually below forecast (see our report on 18-19 budget).

The stable real economy contrasts with the volatile financial market. The Hang Seng Index has fallen sharply in early February (by over 3400 points (-10.4%) but then bounced back and forth. Materials, industrial and telecommunication sectors led the decline. The Hong Kong dollar weakened to a historic low in decades ahead of the FED meeting in March. While we remain confident in the HKD exchange rate regime as the HKMA still has adequate capacity to maintain it, there runs a risk of liquidity squeeze in Hong Kong due to a more aggressive FED normalization that could push up HIBOR higher-than-expected (see our report on HKD).

Going forward, the robustness of the Chinese economy and the continued global recovery are expected to render solid support to the Hong Kong economy. However, the uncertainties about trade war and international monetary environment are started to emerge. As such, we thus forecast the growth for 2018 to slow to 3.0%.

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