Hong Kong: GDP grows at fastest pace in seven years in Q1 but shows signs of a slowdown
May 11, 2018
The economy started 2018 at full throttle, registering impressive 4.7% year-on-year GDP growth in the first quarter, a sizeable acceleration from the 3.4% growth recorded in the previous quarter. This performance defied expectations, as analysts had anticipated growth to be unchanged from the previous quarter at 3.4%. On a seasonally-adjusted quarter-on-quarter basis, economic growth leaped from 0.8% in Q4 to 2.2% in Q1.
Growth in the first quarter was broad-based, supported by stronger external and domestic demand. Private consumption was especially strong, accelerating to an 8.6% year-on-year expansion (Q4: +6.3% year-on-year). This was in good part due to a very tight labor market; unemployment stood at a 20-year low during the quarter. Strong gains in asset markets also supported household incomes, and more optimistic business sentiment was buttressed by the continued strength of the global expansion. Government consumption growth accelerated to 3.9% in Q1, up from a revised 3.2% in Q4 (previously reported: +3.1% yoy). Fixed investment expenditures, meanwhile, moderated in the quarter, growing just 3.8% following a 4.7% expansion in the previous quarter. Purchases of machinery and equipment largely drove the reading, supported by the continued health of the export-oriented sectors of the economy, while construction investment recorded modest gains.
The external sector also performed well in the first quarter. Exports of goods and services rose a healthy 5.6% in annual terms, an improvement from the 3.5% growth recorded in Q4. Shipments of goods benefitted from the continued strength of the global expansion, while service exports were buttressed notably by a strong tourist influx. Growth in imports of goods and services accelerated more modestly, from a revised 4.9% in Q4 (previously reported: +4.8% yoy) to 6.5% in Q1. As a result, the external sector’s contribution to overall growth improved to minus 1.6 percentage points (Q4 minus 2.5 percentage points).
Although growth in Q1 was notably strong, recent developments indicate that growth may well have peaked. The recent trade tensions between the U.S. and China have been a source of “particular concern” for Hong Kong, according to Government Economist Andrew Au, due to their potentially large impact on global trade flows, as well as on investor and business confidence. Furthermore, the ongoing monetary tightening undertaken by the Federal Reserve, which has shown signs of being scaled up in recent months, is poised to provide some headwinds to the expansion going forward. Lastly, leading data from the private sector strongly signal a slowdown heading into Q2, with the Hong Kong PMI retreating under the critical 50-point threshold separating expansion from contraction in April.
Author: Joffrey Simonet, Economist