Hong Kong SAR: 2022 contraction; 2023 rebound

The earlier-than-expected reopening of Chinese border will boost the Hong Kong economy on all fronts.
Group Research, Samuel Tse02 Feb 2023
  • Real GDP declined by -3.5% in 2022. It is expected to grow by 6.5% in 2023.
  • Retail sales value is projected to grow by 20% this year.
  • Shaky demand from the US and EU could be offset by the recovering Chinese economy.
  • We have adjusted our terminal 3M HIBOR forecast from 5.68% to 4.68%.
  • Home prices should stay flat in 2023.
Photo credit: Adobe Stock Photo

Real GDP declines 4.2%yoy in 4Q22 to conclude 2022 at -3.5%. This marked the 3rd annual contraction since 2019. On sequential basis, it is largely flat.  Looking ahead, the earlier-than-expected reopening of Mainland border will boost the Hong Kong economy on all fronts. Due primarily to low base comparison, we have upgraded the 2023 GDP forecast from 3.8% to 6.5%. Meanwhile, inflation will accelerate at a moderate pace of 2.8%. All told, the city’s economy should be in a goldilocks scenario.

Private consumption expenditure grew by 1.7%yoy in 4Q after 3 quarters of contraction. Unemployment rate fell from the 5.4% in Feb-Apr22 to 3.5% in 4Q.  Contraction of labour force narrowed from -3.8% in Mar-May22 to -1.5%  in 4Q22. The strengthening labour market should help jobless rate to fall to pre-social unrest level of 2.8%

Retail sales is set to rebound. Tourists spending accounted for around 30% of overall retail receipts before COVID, of which almost 80% were attributed to Mainland Chinese tourists. Daily visitor arrivals from Mainland leapfrogged from average of 2,100 in Dec-22 to around 10,400-16,400 since the Lunar New Year. This returned to around 40% of Jan-20 level. We expect tourism to see stronger growth momentum after Lunar New Year as China has reached herd immunity. Retail sales value is projected to grow by 20% this year, of which F&B and tourists hot picks such as jewellery, cosmetics and clothing will see the strongest upside. These products saw the largest gap comparing to 2019 level.

On external front,  decline in goods exports extended from 15.8% YoY in 3Q to 24.8% in 4Q amid lingering Zero-COVID policy in China. Shipment to Mainland dropped by 25.0% in 4Q in value terms. Exports to US, EU and UK also plunged by double-digit due to tightening of monetary policy. Baltic Dry Index had retreated recently to mid-2020 level, indicating a sagging global demand. Meanwhile, imports contracted further from 15.8% YoY in 3Q to 22.8 % in 4Q.

Hopefully, shaky demand from the US and EU could be offset by the recovering Chinese economy on entering 2Q23. Afterall, shipments to China account for 60% of Hong Kong’s exports. Cargo and flight capacities are building up in anticipation of recovery ahead.

Gross Domestic Fixed Capital Formation (investment) will rebound on noticeable low base. It fell further by 11.2% YoY in 4Q, down from 14.4% in 3Q. This marked the 13th quarter of contraction in the past 17 quarters. As a result, outstanding loan contracted by 3.9% YoY in December.  That said, machinery & equipment CAPEX will likely rejuvenate on the  back of foreign companies' return.  Meanwhile, both public and private real estate investment could bottom out as government will push the development of New Territories North and West Metropolitan Project as well as Lantau Tomorrow Project. 

Decelerating trend of interest rate is instrumental in shoring up investment sentiment.  ETF net inflow into Hong Kong’s stock market reached USD4.6bn in Nov and Dec, compared to an outflow of USD2.6bn in Oct and Nov. 1M and 3M HIBORs fell from the peak of 5.08% and 5.42% to 2.66% and 3.62% as of yesterday. Even if HKMA acquires HKD from the interbank market (Aggregate Balance) on weaker HKD exchange rate, HKD rates will likely peak out at a lower level. We have downward adjusted our terminal 3M HIBOR forecast from 5.68% to 4.68%.

Against this backdrop, home prices should stabilize and stay flat in 2023. Sentiment has been improving on the border reopening. The Centaline Leading Index saw mild recovery of 0.7% from its 5 year-low in January. Nonetheless, a bumper run is not likely in the near term. Valuation Diffusion Index from major banks slightly recovered from historical low of 1.99 in Dec-22 to 8.51. Afterall, it takes time to rebuild investor confidence. Demand from Chinese investors will likely be subdued as their income level takes time to be mend. Our nowcasting model suggested that the 1Q China GDP will only grow by 2.5% YoY. Also, prevailing negative rental yield suppresses investment demand from both domestic and Mainland investors. Prime rate is now set at 5.625%, with effective mortgage rate stays elevated at 3.625%. This is much higher than rental yield of 2.1-2.7% across all residential property classes.

Inflation measured by the CPI grew at a moderate pace of 1.9% in 2022. Sharp rise of utility prices and food costs were offset by weak rental costs, which accounts for 40% of the CPI basket. This is expected to reverse from its downtrend on improving economic condition. Labour costs will rise due to a tightening job market. As such, CPI projection is adjusted upward from 2.0% to 2.8%.

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Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港

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