Pushing against headwinds: Hong Kong economy slowed down in 2018

• Hong Kong’s GDP growth decelerated further to 1.3% YoY in Q4 from an already weak base of 2.9% YoY in Q3 2018, registering the slowest pace of growth since 2016. The drag mainly came from investment and exporting activities due to sluggish global demand and US-Mainland trade conflicts. Private consumption is the only bright spot, which remained resilient despite some moderation in Q4. Overall, market sentiment was still bearish with PMI hovering below 50.
• Export was still marching on the downward trend in Q4 2018, causing the trade deficit to widen. There seems to be some reversal in the external sector in January 2019 with a narrowing trade deficit but it might only be due to seasonal factors related to the Chinese New Year. On a positive side, inbound visitors arrival continued to record robust growth for 2018 but not enough to compensate for the trade deficit.
• While the economy decelerates, Hong Kong’s labour market has remained resilient. The unemployment rate stayed at a low level with a slight decline in 2018. Total employment grew solidly even at a level close to full-employment with sustained nominal wage growth. Inflation dipped slightly in Q4 on the back of lower prices for clothing and footwear as well as rental expenses.
• The earlier normalization of US monetary policy has led to a tightened monetary stance in Hong Kong towards end 2018, shown by the upswing of HIBOR. However, with a more dovish FED since end January and the related improvement in global liquidity, the upward trend of interest rate came to a halt in early 2019 as HIBOR decreased significantly. On the back of a widening interest rate spread between LIBOR and HIBOR, the Hong Kong dollar has weakened against USD, touching the weakest convertibility rate and triggering HKMA to intervene in the currency market again in March 2019. The stock market also went through a major correction in 2018 due to moderated economic growth and rising geopolitical tensions, though it has rebounded by 15% from Jan 2nd to Mar 15th, 2019, following the Chinese stock market recovery.
• The residential property market underwent consolidation in Q4 2018 with both transaction volumes and flat prices trending down. While there seemed to have some reversing adjustment in early 2019, as the transaction activities picked up and price more stabilized, it still takes time to see whether it is a real reversal or only temporary adjustment. 
• All in all, there is still not clear sign that the Hong Kong economy will reverse the downward trend in the near future or that the slowdown will steepen. As such, we still keep our forecast of Hong Kong GDP to grow by 2.5% for 2019.

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