Hong Kong: Growth slows markedly in Q2 amid increased trade uncertainty and tighter financing conditions
August 10, 2018
The economy cooled noticeably from the seven-year high registered in the first quarter, growing 3.5% year-on-year in the second quarter (Q1: +4.6% year-on-year, previously reported; +4.7% yoy). The print came well under market analysts’ expectations of 4.2%. Furthermore, on a seasonally-adjusted quarter-on-quarter basis, GDP fell 0.2% in Q2, the first contraction recorded since Q1 2016 and contrasting Q1’s 2.1% expansion.
Looking at the domestic sector, the annual print was once again driven by strong, albeit moderating, growth in private consumption. It expanded 6.1% year-on-year in Q2, down from 8.8% in Q1, which was an over seven-year high. Consumption was mostly supported by a combination of a tight labor market, healthy tourist inflows, low inflation and the strong housing market, which likely boosted consumption through a wealth effect. Government consumption growth also accelerated to 4.4% in Q2 (Q1: +3.9% yoy). However, the domestic economy was hampered by a marked slowdown in fixed investment, which only grew 0.4% in the second quarter (Q1: +4.2% yoy). Although investment in machinery, equipment and intellectual property remained robust, there was a contraction in the volatile building and construction sub-sector.
Meanwhile, the external sector also showed signs of moderating in the second quarter, as the growing trade spat between mainland China and the United States likely put a dent in the country’s otherwise strong export momentum. Nevertheless, the slowdown was relatively mild: Exports of goods and services still rose a healthy 4.8% in annual terms, down from the 5.6% growth recorded in Q1. Shipments of goods remained robust, while service exports decelerated more noticeably. As for imports, the same dynamic was at play, with solid growth in goods imports but a marked slowdown in imports of services. Overall, imports of goods and services increased 5.6% in annual terms in Q2 (Q1: +6.5% yoy).
Looking ahead, growth will likely moderate further while remaining solid, although risks for the remainder of the year are largely tilted to the downside. The main downside risk to Hong Kong’s open economy stems from a potential escalation of the U.S.-China trade war. The tightening of monetary policy by the Federal Reserve also looks poised to continue at a rapid pace in the coming quarters due to the strong U.S. economy and rising inflation, which will impact financial conditions in Hong Kong—the territory has a peg to the dollar—and could dampen investment.
Author: Joffrey Simonet, Economist