14 May 2018
Hong Kong: Upgrading GDP growth for 2018

The extremely strong growth of the Hong Kong economy in 1Q18 surprised us. The growth mainly came from consumption created by the wealth effect from rising property prices. As we expect home prices to rise another 5% to 10% in the second half, consumption will continue to be strong and so will GDP growth. We are revising upward our GDP forecast for 2018

Surprisingly strong GDP driven by consumption

Hong Kong GDP grew 4.7% year-on-year in 1Q18, which is strong but consumption is even stronger at 8.6%YoY. We underestimated growth at 3.4%YoY in 1Q, the same as consensus.

Consumption growth could be due to the wealth effect of rising home prices, which have increased more than 20% for most housing units in 12 months. Though other components also grew at a decent rate, we argue that those were mainly due to the base effect from 1Q17.

Home prices will continue to rise albeit at a slower pace in 2H18

Home prices are not likely to stop rising unless there is a big negative unexpected event in the market. Rising interest rates from more Federal Reserve rate hikes would certainly increase the burden of mortgage borrowers, so home prices would rise at a slower pace. But we do not expect a fall in property prices. With new flats becoming smaller, property developers are able to keep new homes affordable to young people with wealthy parents.

In addition, rising home price expectations would also induce existing home owners to refinance their mortgages, even at high interest rates, to invest in an additional property, hoping for some capital gains in the longer term. In other words, the wealth effect would continue to exist for a few more quarters.

Uncertainties mount from trade tensions

On the other hand, we believe that the escalating trade tensions could disrupt Hong Kong's re-export businesses. Those activities would be mainly shipping, port, logistics and trading businesses. 

We revise Hong Kong GDP upward to 3.8% in 2018

We maintain our GDP forecasts for the remaining months of 2018, as good growth from consumption will be offset by trade-related service activities. But the strong growth in the first quarter is sufficient for us to revise our GDP forecast for 2018 to 3.8% from 3.4%.

China to speed up “Made in China 2025” plan

Possible collapse of trade talks is likely to increase uncertainty for Chinese production. But we've kept our GDP growth forecasts unchanged as we expect investment in “Made in China 2025” to offset any potential loss from net exports

We are sceptical about the outcome of trade talks between China and the US over the coming months.

According to media reports, the US demands are mostly related to China's national strategy, “Made in China 2025”. Given that China maintains these demands are unreasonable. Therefore, it is difficult to see Vice Premier Liu He's forthcoming trip to the US yielding any tangible results. The most likely outcome for the second round of trade negotiations will be a stalemate.

Japan: Slow start

It is becoming quite “the thing” to start the year weakly… but with Japan there is genuine room for optimism

It is becoming quite “the thing” to start the year weakly. The US does it almost every year. Europe also seems to have recorded a soft patch in 2018. Japan, too, seems to have started the year in a less than convincing fashion. Consensus opinion has Japan growing at only 0.5% quarter-on-quarter in 1Q18. It is easy to blame bad weather for economic weakness, only for it to turn out that the economy was genuinely weak all along. But in Japan’s case, we think there is genuine room for optimism.

China: Upbeat on activity data

We are optimistic on China's retail sales, industrial production and investment activities in April. We are not particularly worried about the impact of trade tensions on China's growth, as these concerns will most likely speed up investment in the country, which could offset potential losses on exports and related activities

Retail sales growth to be robust

We expect China's retail sales growth to be 10.0% in April, slightly softer than 10.1% in March, supported by higher energy prices, healthcare services, clothing and catering. In other words, we expect consumption to be robust. 

And there is little reason to think this will change in the coming months. Though trade tensions are escalating, and we do not see the risks going away any time soon, consumption is unlikely to be affected if the trade threat does not affect the job market.

In fact, we believe that China could increase workers in high-tech sectors. That means demand for labour could shift from manufacturing to R&D. This could even support average wage growth and therefore spending. 

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Good MornING Asia - 14 May 2018

Once again, the US President has shown willing to soften his tone after an aggressive start - this time over Chinese telecom producer, ZTE

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