Hong Kong: Growth falls to near one-decade low in Q1 on trade woes, investment freefall and flat private spending
The economy slowed for the fourth consecutive quarter in Q1 2019, starting the year with the worst performance since the end of the global financial crisis in Q3 2009. Economic growth in the first quarter declined to a measly 0.6% year-on-year, from a revised 1.2% in Q4 2019 (previously reported: +1.3% year-on-year). The print was weighed on by the slowdown in mainland China and its trade war with the United States, which contributed to a decline in goods exports—a crucial growth engine for the trade-reliant economy—and fixed investment, as well as a near flatlining of private spending growth. On a seasonally-adjusted quarter-on-quarter basis, however, GDP expanded 1.3%, owing largely to a low base effect due to the 0.5% quarter-on-quarter decline logged in Q4.
Despite a solid rebound in the property and stock markets in the quarter—the Hang Seng Index notably gained more than 15% between the beginning of the year and the end of March—private consumption growth fell from 2.7% yoy in Q4 to just 0.2% in Q1. This came against a backdrop of slowing economic momentum in the mainland which likely triggered cautiousness on the part of consumers. In addition, this was partly due to a high base effect, since Q1 2018 saw the highest pace of private spending growth since 2011. On the flipside, government consumption provided some support to domestic demand, logging a growth of 4.5% that was only slightly lower than Q4’s 4.9%.
In a sign that Hong Kong’s fortunes are unescapably tied to the mainland’s, fixed investment contracted for the second consecutive quarter, falling 7.1% yoy in Q1 after declining 5.8% in Q4. Trade concerns continued to loom over the reading, as uncertainty and the hopes of reaching a trade deal in the near future kept businesses in a wait-and-see approach. This led to a slight contraction in spending on machinery, equipment and IP products such as software and patents, and a more sizeable contraction of building and construction investment.
Lastly, the city’s all-important external sector also suffered amid the uncertain trade outlook. Exports of goods shrank significantly in the quarter, while service exports also decelerated noticeably, despite the support provided by tourist inflows—as average spending per visitor declined in the period. The picture was similar for imports, with both goods and service imports contracting in the quarter. Overall, exports of goods and services shrank 3.0%, contrasting the 0.2% growth logged in Q4, while imports of goods and services fell 4.2%, also down from Q4’s 0.5% contraction.
Looking ahead, the short-term economic outlook appears feeble at best. Despite recent stimulus measures, monthly economic indicators suggest the Chinese economy is continuing to lose steam in the second quarter, which should weigh on activity and business confidence in Hong Kong. Moreover, the recent escalation of the trade war on 10 May will further hamper growth at least until the end of the quarter—and likely into H2 2019. A breakthrough to the U.S.-China trade war now appears significantly less likely, which will continue to be a major downside risk to the outlook.