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Low Growh Ahead - Analysis of Hong Kong Economic Trend in 2H 2016

In 1H 2016, Hong Kong economy was affected by the global economic uncertainties, volatile financial markets, relatively high Hong Kong dollar exchange rate, sluggish merchandise trade and tourism performance, and the correction of residential property prices. Following the 1.9% growth in real terms in Q4 2015, Hong Kong real GDP growth slowed to a mere 0.8% in Q1 2016, lower than the 2.4% growth in 2015 and the 3.4% annual average over the past decade. On a seasonally adjusted quarter-to-quarter comparison, real GDP fell by 0.4% in the first quarter, after the 0.2% growth in the preceding quarter.

Hong Kong economy expanded slowly in 1H 2016

1.    Weak external environment adversely affected trade flow. In Q1 2016, the global economic growth remained sluggish. With the slow recovery in the advanced economies, their imports demand continued to be restrained. Together with the volatile financial markets, the downside risks of the global economy intensified. Total exports of goods registered a large year-on-year decline of 3.6% in real terms in Q1, with exports to most major destinations recording contractions. At the same time, the decline of imports of goods deteriorated further to a year-on-year 5.4% in real terms, largely because of the further reduction of import-related re-exports as well as weak retained imports performance.

2.    Contraction of tourism dragged on exports of services performance. Exports of travel services recorded a 13.3% year-on-year plunge in real terms in Q1 2016, far worse than the 6.7% decline in Q4 2015. This was largely due to the sharp contraction in visitor arrivals (Overall visitor arrivals, same-day visitor arrivals and overnight visitor arrivals declined 8.8%, 13.0% and 3.4% year-on-year in the first four months respectively) and weakness in tourism spending. Indeed, the implementation of “one trip per week” Individual Visit Endorsements for permanent residents of Shenzhen had profound impact on Hong Kong tourism performance. The number of visitor arrivals holding “multiple-entry” and “one trip per week” Individual Visit Endorsements amounted to 10.97 million over the first one-year period since the implementation of “one trip per week” Individual Visit Endorsements in April 2015, about 4 million less than the number of visitor arrivals holding “multiple-entry” Individual Visit Endorsements in the preceding year. Moreover, given the reduced trade and cargo flows in the region, as well as the heightened volatility in the global financial markets during the quarter, the overall exports of services declined 4.9% year-on-year in real terms in Q1 2016.

3.    Momentum of domestic demand was slowing gradually. Domestic demand showed signs of slowdown, amid sluggish merchandise trade and tourism performance, and the asset markets correction (residential property prices declined 4.2% in the first four months of 2016). In Q1 2016, private consumption expenditure only increased a mere 1.1% year-on-year in real terms, notably lower than the 2.7% growth in Q4 2015. In addition, the volatile investment expenditure recorded another quarter of sharp contraction, with a 10.1% year-on-year decline in real terms in Q1 2016 (9.4% drop in Q4 2015), reflecting corporations’ cautiousness in implementing their investment plan amid increasing uncertainty over the global economic outlook. Machinery, equipment and intellectual property products registered a sharp 11.9% year-on-year decline in Q1 2016 (12.9% contraction in Q4 2015), while building and construction recorded a mere 0.8% decline (0.9% drop in Q4 2015), mainly affected by the decline in public sector projects which might be somewhat related to slow funding approval progress by the Legislative Council. Finally, government consumption expenditure remained largely stable at 3.2% growth year-on-year in real terms in Q1 2016 (3.3% growth in Q4 2015).

4.    Labour market remained resilient. Since the 2H 2011, the unemployment rate remained largely steady and held at a range near the full employment level of 3.1% and 3.5%. However, because of the weak external and tourism sector performance, as well as the slowing domestic consumption growth over the past few months, unemployment rate edged up one-tenth to 3.4% between March and May 2016 compared to 2H 2015, while wages and income posted further increases, providing some support to the domestic consumption and overall economy.

5.    Consumer price pressure remained moderate. Amid the relatively low growth environment, the consumer price pressure was still moderate. Underlying inflation increased from 2.2% year-on-year in Q4 2015 to 2.8% in Q1 2016, largely driven by the increases in the prices of basic foodstuff related to poor weather, and then fell back to 2.2% in May. Excluding the food-related factor, the domestic price pressure remained under control, attributed to the slowdown in domestic demand, consolidating rental level in tandem with the property market performance, still low global commodity prices, and the overall low consumer price pressure globally.

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Content provided by Bank of China (Hong Kong)
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