Hong Kong’s economy slowed down rapidly as uncertainty increased

• Hong Kong’s economy remained on the deceleration track for Q1 2019, as it witnessed a further deceleration of GDP growth to 0.6% YoY. The most obvious shock stemmed from the uncertain external environment. Export decelerated to 3.1% for Q1, widening the overall trade deficit. As of April, both export and import continued to register decline as the trade war between China and the US escalate, casting doubt on trade growth.
• Against such negative international backdrop, local business confidence remained in contraction, which pushed down the growth of domestic investment and retail sales. This clearly does not bode well for GDP in Q2 given how dependent the Hong Kong economy is on consumption. That said, Hong Kong labour market remained robust, with the unemployment rate kept constant at 2.8% until April. The resilience of the labour market is expected to buffer potential the shocks to consumption and investment.
• As for Hong Kong financial markets, the liquidity environment has been improving. HIBOR remained at low levels before picking up in April and May. Driven by carry trades over a widening interest rate spread between HKD and USD, the Hong Kong dollar weakened against USD, touching the weakest convertibility rate and triggering HKMA to intervene during May. However, it started to rally in June as dollar weakens.
• Overall, Hong Kong’s stock market seems to have priced in more of the financial factors than economic fundamentals. Hang Seng Index recorded strong momentum by rebounding 12.4% in Q1 2019 thanks to the dissipation of Fed hiking expectations as well as the then reported progress in US-China trade talks. The reversal of trade war negotiation deteriorated Hang Seng Index back below 27,000 during May, but recently it has regained momentum by rising more than 3% within one week until 11th of June.
• There is also significant recovery in the property market. The transaction volume of residential properties picked up in both primary and secondary markets compared to 18 Q4. On the front of commercial property, rentals for offices and retail registered 5.4% and 0.3% growth respectively on a year-on-year basis as of April.
• Moving forward, favorable labor market conditions and robust inbound tourism should provide some support in the near term. A dovish FED should also help in terms of the liquidity environment. However, the economic fundamentals are likely to worsen further because of the escalated China-US trade war. Also, the recent social protest against the extradition law brings uncertainties to the political environment surrounding Hong Kong. As such, we lower our forecast for economic growth rate to 2% for 2019.

Full report available for NATIXIS clients.