Hong Kong’s economy upbeat underpinned by private consumption

• Hong Kong’s GDP growth accelerated in Q1 to 4.7% YoY from 3.4%, the fastest growth pace since 2011. Private consumption fuelled the growth by rising 8.6% YoY, underpinned by the positive wealth effect of asset price inflation (especially real estate). Investment carried the momentum into this quarter by strengthening 3.8% YoY amid improved business sentiment across sectors like retail and real estate. Net exports contributed negatively to Q1 GDP growth as imports grew even more vibrantly than exports.
•  The unemployment rate stayed at a historic low of 2.8% and inflation remains moderate at 1.9% YoY in April despite imported inflationary pressures from escalating oil prices.
•  The residential property market continued to be buoyant, showed by still increasing prices and sales volume. Although the hiking cycle of the FED poses headwinds to debt servicing and flat supply is increasing, the abundant liquidity parked in Hong Kong banks provides a strong foothold for property prices in the short to medium term.
• The Hang Seng Index rebounded in the first half of May but then softened as worries of political disruptions and escalating trade war built up. While the monetary policy normalization in major developed markets is expected to induce capital outflows, Hong Kong still enjoys abundant liquidity from the past global quantitative easing and China’s large outflows since 2015.
• Going forward, the consumption and investment momentum is likely to sustain for a while. The Fed monetary policy normalization and increasing inflows into China (due to its financial opening) is possible to cause interest rate to hike in Hong Kong, posing potential challenges for further expansion of asset prices, but the effect make take longer time to realize. In the long term, worries about globalization, especially in trade, may add to the more negative outlook down the road.
• In a nutshell, while Hong Kong’s GDP should start to trend down at some point, the short-term outlook still looks robust. For the time being, we have upgraded our GDP growth forecast to 3.4% for 2018.

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