Hong Kong: Growth slows to two-year low in Q3 on softer consumption, financial tightening and trade woes
November 16, 2018
Economic growth slumped to a two-year low in the third quarter (Q3: +2.9% year-on-year; Q2: +3.5% yoy), a marked contrast from the near seven-year high logged just two quarters earlier but matching market analysts’ expectations nonetheless. Meanwhile, on a seasonally-adjusted quarter-on-quarter basis, GDP grew 0.1% in Q3, contrasting Q2’s 0.2% contraction.
Although the headline print was once again largely driven by consumer outlays, private consumption growth continued to slow markedly, falling to 5.2% year-on-year in Q3 (Q2: +6.0% yoy)—a sharp drop from the near seven-year high print of 8.8% recorded in the first quarter. While still robust, notably thanks to low unemployment, private spending was hampered by a decline in the stock and property markets which caused a negative wealth effect. Property prices, in particular, ended a two-year bull run and weakened in both August and September, with numerous analysts projecting a much more severe market correction in the following quarters. Meanwhile, government consumption growth slowed to 3.3%, down from 4.3% in Q2 (previously reported: +4.4% yoy).
Contrasting Q2’s slowdown, fixed investment spending rapidly accelerated in Q3, which boosted the overall reading. However, this was partly due to a low-base effect after a poor showing in Q3 2017. Fixed investment surged 8.2% (Q2: +1.1% yoy, previously reported: +0.4% yoy) on the back of a sharp rebound in machinery, equipment and intellectual property investment. On the other hand, investment in building and construction continued to slump.
Turning to the external sector, exports of goods and services remained robust (Q3: +4.7% yoy; Q2: +4.8% yoy). However, the growth contribution of the sector nevertheless worsened, as imports of goods and services surged 7.0% in the period (Q2: +5.5% yoy). In a more detailed analysis, goods exports accelerated slightly—partially as manufacturers tried to front-load shipments to beat new U.S. tariffs on Chinese imports—while service exports slowed more markedly. Meanwhile, goods imports accelerated, while imports of services rebounded from the mild contraction logged in Q2.
The economy is expected to continue to slow in the coming quarters. First and foremost, the Hong Kong’s peg to the dollar will force it to follow the U.S. Federal Reserve’s steady pace of rate hikes, which should further weigh on the financial and housing markets, dampening private consumption and investment in turn. The country is also vulnerable to the escalation of the Sino-American trade spat. According to Iris Pang, an economist at ING, “the trade dispute looks set to hurt the economy through logistics, exports and eventually, wage growth in export-related industries”, and it could also amplify price corrections in the property market.
Author: Joffrey Simonet, Economist