10 Feb 2012
Economic Growth Losing Momentum
| Hong Kong’s economic growth slowed to 3.0% in 4Q11, from 4.3% in 3Q11. While the aggregate number was broadly in line with expectations, the details were more worrisome. Growth of private consumption, the main growth driver over the last couple of quarters, registered a sharp deceleration in 4Q11. With global uncertainties abound, the local economy could see further growth deceleration ahead. Exports and investment could feel further pain as the ripples caused by the Chinese New Year seasonality fade and the eurozone recession deepens. Retail sales are also expected to be less stellar as consumers become less optimistic about the outlook. Overall, Hong Kong’s sequential growth trend is likely to remain muted through 1H12; a sequential contraction could also not be ruled out. For the year as a whole, we have revised downward our real GDP growth forecast to 3.0%. Consumer price inflation may continue to demonstrate a sticky pattern in the near term due to strong festive demand. It should nonetheless edge down further through the course of 2012, reflecting slower economic growth, falling food prices and flat housing rentals. We expect inflation to slow to an average of 4.0% in 2012, from 5.3% in the previous year. |
Externally-led slowdown in Q4
Hong Kong’s economic growth slowed amidst a sluggish global environment. Q4 GDP expanded 3.0%, from 4.3% in 3Q11. Net exports continued to be the primary drag on the economy, subtracting 2.1 and 0.7 percentage points from headline growth in 4Q11 and 2011 respectively. Inventory liquidation deducted another 0.8 percentage points off GDP growth in 4Q11.
Still, the pace of slowdown in Hong Kong has been milder than that in other industrialized Asian economies, thanks to the strength of its domestic economy. The worrying trend, however, is that consumer spending seems to have succumbed to external economic difficulties. Private consumption expenditure growth registered a sharp deceleration at 6.4% in 4Q11, from 9.8% and 9.7% in 3Q11 and 2Q11 respectively. As the effects of weaker trade are feeding through the domestic economy, the risks are skewed to the downside. That led us to mark down our GDP growth estimate to 3.0% from 4.0% for 2012. We believe Hong Kong’s sequential growth trend is likely to remain muted through 1H12. That said, recording another sequential contraction is also possible, but we do not anticipate the magnitude to be as deep as the contraction in 2Q11.
Retail sales surprised on the upside side
What is surprising is how resilient consumption demand was in 2011, particularly despite the gloom in the global economy. Hong Kong’s retail sales growth stayed strong at 23.4% in December. After adjusting for inflation, marginal momentum has even been mildly improving. Retail sales volume rose by 17.1% in December, 0.2 percentage points higher than the reading in the prior month.
Sector-wise, consumers seem to have shown greater willingness to ratchet up purchases of big-ticket items. Sales of consumer durable goods leaped 37.4%, after advancing 31.7% in November. High-end consumer products are the main beneficiaries of strong inflows of mainland Chinese tourists and their growth is expected to outpace the broader market. To note, tourist arrivals were up 17.1% in December, accelerating from a 16.4% growth in November.
Spending by local residents also stayed resilient as domestic household employment/income outlook remains healthy. Retail sales excluding jewellery, watches, electronics goods and photographic equipment, an indicator of local consumption power, advanced at a healthy pace of 21.9%. This latest upsurge is believed to be associated less with rising asset prices and more with improving income prospects. Hong Kong’s labor market maintains its buoyancy throughout the year. The jobless rate remained at full employment levels of around 3.3% in December. The HKD6,000 cash handouts delivered over the quarter also helped prop up domestic demand.
In sum, a robust employment market and vibrant tourism have been the major supporting factors behind consumer spending. We envisage inbound tourism to expand at a still respectable but less vigorous pace in 2012, as growth in the Mainland moderates. The impact of the weaker global economy will also soften employment prospects. The budgetary measures could offer some buffer to household spending, but the impact is likely to be limited. We foresee retails sales to be less stellar in the coming months, before bottoming out at the beginning of 3Q12.
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Hong Kong Economic Monitor (February 2012). Hang Seng Bank Limited. All rights reserved. Reproduction of article(s) in whole or in part is permitted provided the source is quoted. Please direct any inquiry to Economic Research Department, G.P.O. Box 2985, Hong Kong.
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