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Hong Kong Economy Will Continue Its Moderate Growth Trend

Another year of moderate growth in 2015

In the first three quarters of 2015, Hong Kong economy expanded 2.5% in real terms, continuing its moderate growth trend of 2.4% and slowing markedly from the 3.9% average over the past decade. This was largely due to the subdued global economic recovery, moderate Mainland’s economic momentum, weak trade-related and inbound tourism activities, as well as local labour and land constraints. A 2-3% growth trend is now the new normal for the Hong Kong economy, with the characteristics of this year growth summarised as follow:

1. Weak external environment and strong US dollar exchange rate affected Hong Kong’s external competitiveness. The advanced economies have yet improved from the weak recovery since the global financial crisis. The growth momentum of the US was much weaker than the past economic cycles. The Eurozone economy has yet returned to the stage of full recovery and still suffered from the aftermath of its debt crisis, with divergent performance among its member states. The Japanese economy remained stagnant in the last two quarters. The emerging and developing economies also faced intense downward pressure. Not only did the Mainland economy undergo a period of rebalancing, those commodity exporting countries, like Russia and Brazil, have even entered into recession amid the weak commodity price environment. As a result, market concern over global and Mainland economic outlook intensified, together with the rising expectation of a US rate hike, leading to sharp capital outflows from the emerging economies and significantly affecting the trade activities in the region. Moreover, the Hong Kong dollar exchange rate also strengthened notably under the linked exchange rate system, and resulted in a 2.2% contraction in real terms in Hong Kong’s total exports of goods in the first three quarters of 2015 over the previous year.

2. Tourism industry slowed, negatively affecting exports of services performance. There were several reasons attributed to the weakness of inbound tourism. For example, the weaker-than-expected global economic performance, strong Hong Kong dollar exchange rate, limited new tourism hotspots, no further expansion of the individual visitor scheme of Mainland tourists, and the preference of economically better-off Mainland tourists to visit other places around the world. Against this background, the number of visitor arrivals declined 0.8% in the first ten months of 2015 over the previous year, and the number of higher spending overnight visitor arrivals declined notably by 4.0% during the same period, with the number of overnight long-haul (including the Americas, Europe, Africa, Middle East and Australia, etc.), short-haul (not including the Mainland) and Mainland visitors declining 1.6%, 2.7% and 4.7% respectively. As such, Hong Kong’s exports of tourism services declined 3.9% in real terms in the first three quarters of 2015 over the previous year, leading to a 0.1% contraction in overall exports of services during the same period.

3. Domestic demand held up well on the back of full employment. With the subdued external environment, Hong Kong’s economic growth was mainly supported by resilient domestic demand over the past few years. Since the second half of 2011, the employment market has continued to be in the state of full employment. Even though there is increasing concern over lower skilled employment segment amid the more challenging global and Mainland economic outlook, weaker tourism and retail performance and the strong Hong Kong dollar exchange rate affecting Hong Kong’s external competitiveness, the employment market remained largely steady and the unemployment rate stayed at 3.3% between August and October 2015, within the low level of 3.1%-3.5% since the second half of 2011. Moreover, employment income continued to grow and the monthly median household income also grew notably in real terms, in particular after the upward adjustment of statutory minimum wage rate in May 2015 and subdued inflationary pressure. The steady employment and better income prospect has, no doubt, supported Hong Kong domestic condition, with the private consumption expenditure increasing 5.2% in the first three quarters of 2015 over the previous year, higher than the 4% average in the past three years.

4. Relatively healthy asset markets also supported domestic demand, despite increasing downward pressure. This round of property up-cycle has lasted nearly 12 years, increasing more than 4.2 folds from its low in 2003. Against the background of limited supply, low interest rate environment and solid employment market, the residential property prices in Hong Kong rose 8.7% in the first ten months of this year. Moreover, the equity markets in Hong Kong followed the Mainland’s buoyant performance in the second quarter, with daily turnover once increasing to a fresh record high of over HK$200 billion. As a result, the relatively healthy property and equity markets have supported domestic demand. However, following the Mainland and global financial markets correction, the equity markets in Hong Kong declined sharply in the third quarter. Together with the concern over global economic slowdown and an interest rate hike by the US Federal Reserve, the residential property prices are now facing increasing downward pressure. Fortunately, the property market is mainly driven by owner-occupiers, with the proportion of transactions at sharply discounted prices remaining low. According to the property agency data, the residential property prices declined roughly 4.8% from its peak in September to the end of November (the government data showed a decline of 1.1% in October), relatively mild compared to its huge increase over the past decade and has yet seriously affected the overall economy.

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Content provided by Bank of China (Hong Kong)
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