The Hong Kong economy expanded a disappointing 1.8% year-on-year in the second quarter of 2014, slower than the 2.6% growth in the first quarter. The underperformance caused the government to revise its full-year growth forecast to 2-3%, from 3-4% previously.
Private economists also tempered their projections. Bank of America Merrill Lynch downgraded its 2014 GDP forecast to 2.3%, from 2.6% originally, although it retained its 2015 forecast of 2.5%. Europe’s RBS, which originally expected full-year 3.2% growth, cut its forecast to 2.4%.
The second-quarter result marks “the slowest growth since the third quarter of 2012,” said Government Economist Helen Chan. “The weak performance was mainly weighed down by a fall-off in tourist spending and a concurrent slowdown in domestic demand.”
Mainland China tourists have kept their wallet shut in part because of the PRC’s slowing growth and an anti-corruption drive that has targeted conspicuous spending. Visitor numbers to Hong Kong in June 2014 rose only +6.9% year-on-year, the first single-digit monthly increase since February 2011.
Purchase of luxury goods like jewelry and watches has remained restrained, according to Bank of America. RBS also pointed to the weak 1.2% growth in private consumption, the slowest since Q4 2009, which could be due to a deceleration in employment and wage growth in recent months.
In advance of the formal announcement on August 15, Secretary for Financial Services and the Treasury Chan Ka-keung, warned that slowing exports are affecting growth. “Recent trade and export data showed a slower demand from overseas markets in recent months,” he said. “This is because the US and many other overseas markets have recorded lower expected economic growth.”
According to Bank of America economists, the significant slowdown continues in exports, particularly in travel services (-11.5% year-on-year) and exports of services (-2.3%, down from +3.3% in Q1 2014). The result is the first decline since Q2 2009.
It’s not all gloom. The foreign exchange market, says Secretary Chan, is seeing an average turnover of RMB spot and forward transactions of some US$20 billion to US$30 billion equivalent every day. He describes Hong Kong’s offshore market achieving phenomenal progress within the past three years.
Later this year, the Shanghai-Hong Kong stockmarket “through-train” scheme is expected to be launched. This will allow Hong and international investors to invest in shares listed in the Shanghai Stock Exchange through Hong Kong and Chinese investors to trade stocks in Hong Kong in Shanghai.
Risk to the Downside
But the head of the Hong Kong Monetary Authority, Norman Chan Tak-lam, has repeatedly warned of possible economic instability. “US interest rates may rise as a result of the US Government starting to wind down monetary policy,” he said on August 11. “This may cause the Hong Kong interest rate to rise as a result and that would hurt the property market.”
RBS expects a pick-up in the second half of 2014 in on the back of exports and a moderate rise in China’s GDP growth. However, it anticipates only a modest recovery because of three “downward risks.”
“While we still expect reasonable global demand growth, we now no longer expect a significant acceleration in global demand,” RBS economist Tiffany Qiu and Louis Kuijs wrote in an August 15 report. “Visitors from mainland China and the attendant spending have decelerated recently, and we think its growth will remain subdued. And Hong Kong's property market, especially commercial real estate, is still facing major headwinds.”
Other analysts are wary of the uncertainty caused by the Occupy Central movement. Organizers say they may call on thousands of supporters to a sit-in at the city’s Central Business District in September if authorities in Hong Kong and China dilute the promise of universal suffrage and direct election of the city’s chief executive.