Hong Kong: Real GDP Growth Slowed in 1q14

Hong Kong: Real GDP Growth Slowed in 1q14    

• The Hong Kong economy grew by a slower-than-expected 2.5% yoy in 1q (OSK-DMG: 3.7%, consensus median: 3.0%), down from a revised 2.9% in 4q. On a seasonally adjusted qoq basis, real GDP growth softened to 0.2% in 1q from 0.9% in 4q on the back of slower domestic demand and weaker exports. Private consumption, which accounts for more than 60% of GDP, rose 2.0% yoy in 1q compared to 3.6% in 4q, partly due to a high base effect and weaker local stock market performance. The housing wealth effect also weakened as the property market continued to cool. Nevertheless, the labour market held up, with the seasonally adjusted unemployment rate edged down to a 16-year low of 3.1% in 1q, while incomes continued to rise further.  
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• In 1q, growth in gross fixed capital formation eased to 3.0% yoy from 5.3% in 4q, partly dragged down by slower expansion in the acquisition of machinery and equipment following a strong growth in the earlier quarter. Private expenditure on building and construction, meanwhile, reverted to an increase of 3.0% yoy in 1q after four consecutive quarters of decreases. Public building and construction expenditure likewise jumped 20.6% yoy after falling 7.4% in 4q, as large-scale infrastructure works picked up momentum. In 1q, government spending increased by 2.4% yoy, which was slightly higher than the 2.0% growth recorded in the previous quarter.
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• Real exports of goods rose by a mere 0.5% yoy in 1q, slowing from 4q’s 5.7% increase, mainly affected by falling demand from Mainland China and a sharp weakening of exports to major advanced economies. Exports to other key Asian markets also slowed. Likewise, real exports of services grew slower at 3.1% yoy in 1q compared to 4.7% in 4q, dragged down by the weakness in exports of trade-related and transportation services. Growth in the imports of goods and services slowed to 1.2% and -0.2% yoy from 6.1% and 5.5% in 4q respectively, with the result that the external sector continued to make a negative, but smaller, contribution to real GDP growth in the quarter. Overall, net exports dragged growth by -0.2 ppt in 1q (vs. -1.2 ppt in 4q). Private consumption contributed 1.4 ppt, down from +2.3 ppt in 4q. Total investment (including changes in inventories) added another 1.0 ppt (vs. +1.5 ppt in 4q) while government spending continued to post a contribution of 0.2 ppt to growth.
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• As a whole, in light of the weaker-than-expected 1q GDP figures, we have lowered Hong Kong’s full-year growth forecast for 2014 to 3.1% from 4.2% projected earlier and compared with 2.9% in 2013. This is at the lower end of the government’s forecast range, which remained unchanged at 3-4% for this year. Prospects for growth in the remainder of the year are still expected to improve, largely on account of further recovery in the advanced economies and slightly faster growth in domestic demand amid better global economic conditions. In particular, private consumption is envisaged to strengthen with the support of low unemployment, rising income and positive consumer confidence. Ongoing infrastructure works as well as a pickup in machinery and equipment acquisition due to brighter external outlook and stronger business prospects should also render support to GDP growth. On the other hand, economic growth momentum in Mainland China is expected to stabilise in the 2q and recover moderately in the second half, helped by the government’s measures to boost growth recently. The projected largely stable China’s growth is likely to lend support to Hong Kong’s export performance, including travel-related services exports in the latter part of the year.