Hong Kong SAR: GDP rebounds

The city’s economy is in a goldilocks scenario.
Group Research, Samuel Tse03 May 2023
  • Real GDP rebounded by 2.7% YoY in 1Q23 on low base comparison.
  • Growth of private consumption expenditure, which accounts for 60% of HK’s GDP, was the major driver.
  • Inbound tourism is on track as evidenced by favourable tourism data.
  • Plunge in Gross Domestic Fixed Capital Formation (investment) reversed its lingering downtrend.
  • We maintain our 2023 real GDP growth forecast of 6.5%.
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Real GDP rebounded by 2.7% YoY in 1Q23 on low base comparison. On sequential basis, it advanced 5.3%QoQ. Given the strong growth momentum and the speedy recovery of the Chinese economy, we maintain our growth forecast of 6.5%. Meanwhile, consumer inflation was modest at 1.7% in March. All told, the city’s economy is in a goldilocks scenario. 

Growth of private consumption expenditure, which accounts for 60% of HK’s GDP, was the major driver. It accelerated  from 1.7%YoY in 4Q22 to  12.5% in 1Q. Domestic consumption was largely normalized as all social distancing measures were removed since 1Mar. The tight labour market also supported consumption sentiment. Jobless rate fell to 3.1% in 1Q, compared to the pre-COVID level of 3.3% in 4Q20. Amelioration of economic situation also enticed inactive population to re-join the workforce. Labour force contracted by 0.8% in 1Q23, a little better than -1.6% in Dec22-Feb23.

Retail sales were up by 17.3% YoY in Jan-Feb23 or 31.3% in Feb23 alone, thanks to the influx of Mainland tourists. Alcoholic drinks and tobacco, as well as other tourist hot picks such as jewellery, clothing & footwear, and optical shops recorded triple-digit growths. The retail sales receipt should continue to improve. During the first 3 days of the week-long labour day holiday, the number of Mainland visitors reached 451,331 or 53.7% of the 2019 level.

On external front, decline in goods exports slightly improved from 24.9% YoY in 4Q22 to 18.7% in 1Q23 alongside the build-up of  shipment and cargo capacities. In value terms, the contraction eased from 25.4% in January-February to 1.5% in March. That to Mainland (60% of HK’s exports) narrowed from 30.9% to 9.8% in value terms. Meanwhile, outward shipments to US and other major trading partners reversed from the prolonged downtrend to high single-digit or double-digit growth despite cloudy external outlook.

Plunge in Gross Domestic Fixed Capital Formation (investment) reversed its lingering downtrend from -8.9% YoY in 4Q22 to 5.8% in 1Q23. This marked the end of the 5th consecutive contraction. Mirroring the improving investment sentiment, HKD loan growth has been recovering lately.

1M HIBOR rose from 2.79% in March to 3.55% as of today amid HKMA interventions of buying HKD. Aggregate Balance is now even lower than the level seen in the last rate hike cycle at HKD49bn. Yet, the HKD stays at the weak side of Convertibility Undertaking of 7.85 against USD due to widening spread between HKD and USD rates. 1M HIBOR and SOFR spread stood at 164bps. This compared to the widest level of 153bps seen in the last rate hike cycle. Therefore, we expect another round of HKMA intervention. The 1M and 3M HIBOR will reach 4.33% and 4.73% by end of this quarter, thereby narrowing the spread to 80bps or 40bps respectively.  

Against this backdrop, bumper run of home prices should ease in the near term. Weekly transaction fell from 1,686 in March to 1,257 in April as pent-up demand was somewhat absorbed. 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 3.375%. This is much higher than rental yield of 2.1-2.7% across all residential property classes. More importantly, developers are adopting conservative pricing strategy. As opportunity costs (i.e. interest rates) are soaring, incentive on holding inventory is weakened. This put a ceiling on home prices. Meanwhile, influx of Chinese capital is conditional on recovery of the onshore real estate market. Primary markets transactions (contributes to over 60% of the total market shares) in Mainland China were still 30% below the 2021 level. Afterall, it takes time to rebuild investor confidence.

As such, rebound of rent will likely be gradual too. This will in turn keep the CPI at bay. Afterall, it accounts for over 40% of the CPI baskets. Coupled with the recovery in consumption sentiment and labour market, headline CPI will accelerate from 1.7% YoY in March to average of 2.8% for 2023.

To read the full report, click here to Download the PDF.  


Samuel Tse 謝家曦

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

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