Hong Kong: Growth picks up to nearly six-year high in Q1

The economy began 2017 on the front foot, with strong growth underpinned by a recovery in exports and solid fixed investment growth. Economic growth hit 4.3% in Q1 over the same quarter of the previous year, which came in above Q4 2016’s revised 3.2% (previously reported: +3.1% year-on-year) and beat market analysts’ expectations of 3.7% growth. Building on last year’s economic momentum, the print represented the fastest acceleration in nearly six years. Q1’s strong print suggests that the economy is on track to meet the government’s 2.0% to 3.0% annual growth target this year.

Q1’s unexpectedly robust growth came on the back of a surging external sector. Exports of goods and services were up 8.0% (Q4: +4.5% yoy), the largest increase in four years. The territory benefited from a pick-up in global demand, particularly from the Chinese mainland. Similarly, imports grew a hefty 8.7% in Q1 (Q4: +5.1% yoy), reflecting strong domestic demand and higher commodities prices. As a result, the external sector’s net contribution to overall economic growth was little changed at minus 1.1 percentage points (Q4: minus 1.0 percentage points).

The domestic economy also notched a few wins in Q1 on the back of full employment—as noted by the authorities—and a hot property market. Robust fixed investment accelerated 6.4% in the quarter (Q4: +5.6% yoy) as building and construction accelerated across both the public and private sector. Private consumption logged 3.7% growth in Q1 (Q4: +3.6% yoy), boosted by the ongoing recovery in tourism and rising real wages due to low inflation. Government consumption climbed 3.7% in Q1 (Q4: +3.4% yoy) mainly due to ongoing fiscal support from the Hong Kong authorities.

On a quarter-on-quarter basis, Hong Kong’s economy grew a seasonally-adjusted 0.7% in Q1, which was below Q4’s 1.2% increase.

Chief Executive-elect Carrie Lam stands to inherit an improving economy when she takes office on 1 July. Despite Q1’s strong outturn, however, a number of factors indicate that better-than-expected growth will not persist through the rest of the year. While the external sector should continue expanding at a healthy rate given improving global demand, investment spending at home is expected to moderate in H2. Other factors also threaten Hong Kong’s healthy growth momentum, including higher interest rates—as the Monetary Authority follows the lead of the U.S. Federal Reserve—that could cool the booming real estate market. Protectionist trade policies that could hurt the export-driven economy have thus far not materialized in the wake of the new U.S. administration, although that could quickly change at any time. Moreover, ongoing political uncertainty in the European Union and the possibility of an abrupt slowdown in China are each casting long shadows on the economy. On the other hand, tourism is expected to remain robust through the year and contribute to higher retail sales throughout the territory.

The government expects the economy to grow a rate of between 2.0% and 3.0% this year. FocusEconomics Consensus Forecast panelists see GDP expanding 2.3% in 2017, which is up 0.2 percentage points from the previous month’s estimate. For 2018, the panel also expects the economy to grow 2.3%.