Hong Kong: Growth tumbles again in Q4 on broad-based deterioration amid worsening external environment
The economy decelerated for the third consecutive quarter in Q4 2018, as Hong Kong continued to grapple with the ongoing slowdown in mainland China and ripple effects from the trade war. Economic growth in the fourth quarter came in at a paltry 1.3% year-on-year, less than half of the revised 2.8% growth logged in Q3 (previously reported: +2.9% year-on-year) and marking the weakest showing of the economy since Q1 2016. The print furthermore markedly undershot analysts’ expectations of a 2.2% expansion. On a seasonally-adjusted quarter-on-quarter basis, GDP contracted 0.3% in Q4, contrasting Q3’s 0.1% increase. Overall in 2018, annual economic growth for the full year clocked in at 3.0%.
Looking at the details, the deteriorating external environment had a broad-based impact on the economic performance in the quarter. Private consumption growth for instance slowed markedly, from 4.8% yoy in Q3 to just 3.1% in Q4. This largely resulted from poor performances in the stock and property markets in the quarter—owing to trade uncertainty, higher U.S. interest rates and a worsening Chinese outlook—causing a negative wealth effect. Government consumption growth, however, picked up to 5.0% in Q4, from 3.3% in Q3.
Fixed investment fared particularly poorly in Q4, contracting 5.4% yoy and markedly contrasting Q3’s 9.2% growth. This was due to two main factors. First, several billion-dollar infrastructure projects, namely a bridge and a high-speed train line linking Hong Kong to mainland China and Macau, were nearing completion by the end of Q3. Second, financial market woes and trade war effects dampened investment momentum, notably in residential property as reflected by contracting private construction investment in the quarter.
Lastly, goods and services exports slowed to a near standstill, rising 0.2% yoy (Q3: +4.8% yoy) as goods exports mildly shrank due to the trade war, while service exports slowed on lower spending from mainland Chinese visitors—despite higher tourist influxes. Similarly, imports of goods and services contracted 0.5% yoy (Q3: +7.1% yoy), led by lower imports of goods.
Looking ahead, prospects are likely to remain dim in the near-term. Although analysts at Nomura believe “sequential GDP growth will rebound in Q1 2019, supported by a stock market rebound and the apparent stabilization of house prices”, they nonetheless maintain that “US-China trade tensions, a worsening economic slowdown in China and tight financial conditions will likely drag on local economic activity in Q2”. With that said, analysts at ING and Morgan Stanley are cautiously optimistic regarding a growth rebound in H2 2019, critically depending on the evolution of U.S.-China trade talks. According to them, President Trump’s recent decision to postpone a key deadline to escalate tariffs is a positive sign. In addition, several policy easing measures in China and the prospects of fewer interest rate hikes from the Fed could further support the medium-term outlook.