Hong Kong: Downgrading GDP forecasts
Hong Kong GDP growth was surprisingly slow in 3Q, at 2.9% year-on-year. Consumer spending has been growing at a slower pace and there are risks ahead, as the trade dispute looks set to hurt the economy through logistics, exports and eventually, wage growth in export-related industries. As such, we're cutting out forecasts
Hong Kong GDP growth slowed more than expected
GDP slowed to 2.9% year-on-year in 3Q18 from 3.5% previously. It was the slowest rate since 3Q16.
The main factor behind the slowdown was consumption. While this still grew 5.2% YoY in 3Q18, it was the slowest growth rate since 1Q17. We believe this is a result of consumers making large down payments on residential properties, which reduced the pool of money available for other purchases.
The other unexpected effect is that front-loading export activities in China have distorted export and import growth data. We believe that this distortion will continue in 4Q18 as tariffs on $200 billion of Chinese imported goods into the US will increase to 25% on 1 January 2019.
Consumption contribution slowed substantially
Rising interest rate during economic downturn
The exchange rate system is not helping the economy. As the Federal Reserve is going to raise the Fed Funds Rate into 2019, Hong Kong interest rates should follow suit in theory under Hong Kong's linked exchange rate system. That is, the economy faces a downturn at the same time interest rates are rising.
On the Hong Kong dollar, after sticking to HKD7.85 per dollar, the upper bound of the linked exchange rate system, the HKD is heading towards 7.80, the mid-level of the range of 7.75 and 7.85 (spot rate: 7.83).
There are opposing forces that are driving the HKD:
- On the one hand, falling interbank interest rates (HIBOR) attract activities that buy US dollars and sell HK dollars in the market.
- On the other hand, banks in Hong Kong have raised lending and deposit interest rates to close the gap of USD and HKD, and should strengthen HKD against USD.
Whether the HKD will continue to strengthen to 7.80 depends on whether banks in Hong Kong continue to raise interest rates when the next Fed rate hike arrives, possibly in December.
Fed funds rate is affecting HIBOR and hence HKD
Hong Kong housing transactions fall after prices reach high
Growth will be even slower in coming quarters
The trade dispute between China and the US will continue to hurt import and export activities as more than half of exports go to Mainland China. And consumption activities will still be constrained by the money that has been spent on down payments. These individuals will need to rebuild their savings pool and therefore are likely to spend less in coming quarters. In addition, a falling stock market and housing market could fuel a negative wealth effect, and hurt consumer sentiment.
To cushion the economy, we expect that the government will speed up the construction of public housing to cushion some of the negative impact.
Considering all these factors, we revise our GDP growth forecast downward to 2.2% YoY for 4Q18 from 2.8% YoY and to 3.3% for 2018 from 3.6%. For 2019, we predict growth of 2.2% compared to a previous forecast of 2.6%.
Hong Kong exports rely on Mainland China
Download
Download article
19 November 2018
Good MornING Asia - 19 November 2018 This bundle contains {bundle_entries}{/bundle_entries} articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).