6 June 2012
An Analysis on the Plunge in Hong Kong’s GDP Growth and Prospects
As the European debt crisis rages on, Hong Kong’s economy had been widely expected to gradually slow down. However, the dramatic decline in Hong Kong’s first-quarter GDP growth to 0.4%, 4.6 percentage points lower than the rate of growth for 2011, still came as a shock to many people. Has Hong Kong’s economy bottomed, and what are its prospects? This paper aims to answer these popular questions.
1. Will external demand stabilize?
The steep fall in external demand is without doubt the main reason for the plunge in GDP growth. Therefore, the future trajectory of Hong Kong’s economy will largely depend on the prospects of stabilization in external demand. In the first quarter, Hong Kong’s merchandize exports declined 1.5% compared with the same period last year. It was the first quarterly decline since the recovery in trade in 2010 and came in 18 percentage points lower than the average growth rate in the last two years. Adjusted for inflation, the decline widened to 5.7%, which was the worst performance since the fourth quarter of 2009 and over 20 percentage points lower than the average real growth rate in the past two years. As a result, net exports dragged down Q1 GDP growth by 4.7 percentage points, 1.4 percentage points greater than the average drag of 3.3% in the past two years. Since net exports accounted for over 90% of the drop in first quarter GDP growth rate, it is clearly the main culprit of the rapid deceleration of economic growth.
The decline in merchandize exports will definitely impact service exports. For the time being, thanks to booming demand from mainland tourists, Hong Kong’s travel service exports have continued to grow strongly at rates of over 15%. However, Hong Kong’s overall service exports growth still declined to 9.1% from the average pace of 18.9% in the past two years. The inflation-adjusted real growth amounts to only 3.6%, considerably lower than the 10.7% average clip over the last two years. Net service exports contributes 1.1 percentage points to first quarter GDP growth, significantly smaller than the 3 percentage-point average over the last two years. In other words, in the first quarter, the contribution of service exports to Hong Kong’s economic growth weakened by more than 60% compared with the average of the past two years, lowering GDP growth by 1.9 percentage points.