Hong Kong: Economic growth defies slowdown fears to accelerate in Q3
November 11, 2016
Hong Kong’s economy found solid footing in the third quarter after a troubled start to the year had raised concerns of further deceleration. GDP expanded 1.9% in Q3 over the same quarter last year, which was above the 1.7% increase recorded in Q2 and a marked improvement over Q1’s 0.8% rise. The print beat market expectations, which had seen the economy growing 1.5% in the third quarter.
The strong reading in the third quarter saw domestic drivers making a return as household spending increased its contribution to GDP for the first time in four quarters and fixed investment rebounded and grew at the highest rate in over three years. A healthy job market underpinned domestic demand and a recovery in the stock and housing markets buttressed higher local spending. This prompted private consumption to grow 1.2% in Q3, which was a notable improvement over Q2’s 0.5% expansion. Stimulus efforts by Hong Kong’s authorities in the face of weak external demand have also led to strong government consumption in recent quarters, which nonetheless decelerated to a one-year low in Q3. Government spending expanded 3.3% in the third quarter, a notch below the second quarter’s 3.5% increase. Fixed investment rebounded in the third quarter following four consecutive quarters of contraction, and recorded a 6.0% increase (Q2: -5.0% year-on-year). A well-performing property market buttressed construction activities while machinery and equipment acquisition reverted to strong growth in Q3. A buildup of inventories also contributed strongly to Q3’s GDP figure, with PMIs for the July to September period pointing to mounting stocks of materials.
On the external side of the economy, exports of goods and services were up 1.1% in Q3 (Q2: +0.6% yoy), the largest increase in over two years. This was the result of gradual stabilization in regional trade flows, particularly in mainland China, where recent data pointed to another year of robust growth. However, exports of travel-related services remained sluggish as a result of subdued tourist arrivals to the island. Imports of goods and services increased at a faster rate than exports, recording a 2.3% increase in the third quarter, notably above the second quarter’s 0.4% rise. As a result, the external sector’s net contribution to overall economic growth fell heavily from plus 0.4 percentage points in Q2 to minus 2.4 percentage points in Q3, the worst result in four and a half years.
On a quarter-on-quarter basis, Hong Kong’s economy grew a seasonally-adjusted 0.6% in Q3, which was notably below Q2’s 1.6% increase.
Despite this quarter’s robust growth, several factors threaten Hong Kong’s economic performance. Recent measures aimed at cutting short a housing market bubble are likely to make their way into the economy, hampering growth in private spending and investment. In addition, recent PMI readings for the fourth quarter point to decreases in inventories, which will prevent a sustained contribution of stocks to GDP. In the political arena, heightened tensions with China and the aftermath of the U.S. presidential elections could further tilt risks to the downside, as Nomura research analyst Young Sun Kwon comments:
“The US policy agenda could pose further downside risk as Hong Kong is the entrepot for a significant amount of business between China and the US. Declining trade volumes would be negative for local business. Concerns over US protectionism and a deteriorating relationship with China could be hugely detrimental to the financial sector and property markets.”
Author: David Ampudia, Economist