Hong Kong SAR: Slowdown not worrisome

Headline growth slowed on base effect.
Samuel Tse02 Nov 2021
  • Real GDP grew by 5.4% YoY in 3Q21, down from 7.6% in the previous quarter
  • We remain cautiously optimistic that the border with Mainland china will reopen by the end of 1Q22
  • We maintain our 2021 forecast at 6.0% and 3.0% for 2022
  • We have downgraded our property price projection for 2021 from 7.5% to 5.0%
Photo credit: AFP Photo

Headline growth slowed on base effect

HKSAR’s real GDP growth slowed to 5.4% YoY in 3Q21 from 7.6% in the previous quarter. On a seasonally adjusted QoQ basis, it rose by 0.1% mainly reflecting some slowdown in exports of goods amid the electricity shortage in Mainland China. We expect the 4Q GDP growth to slow further to 3.8% to conclude the year at 6.0%. For 2022, it is projected to advance by 3.0% under the assumption that China will re-open its borders early next year.

Consumption rebounded on cash vouchers

Private consumption held up well at 7.0% YoY, compared to 7.2% YoY in 2Q. Retail sales accelerated to 11.9% in August from 2.8% in July after the cash voucher was issued. Discretionary spending such as clothing and jewelry witnessed more appreciable growth of 40.0% and 27.8% respectively. Hotel occupancy rate also rebounded from 29% in February 2020 to 71% in September this year amid strong demand from staycation and short- term tenure. CPI speeded up from 0.8% in 2Q to 2.3% in 3Q; clothing saw the most apparent acceleration of 8.7% in September. Vaccination progress picked up with almost 60% of the population fully vaccinated.

Looking ahead, further relaxation in local social distancing rules should boost the recovery. Second round of cash voucher issuance HKD2,000 issued in October will continue to fuel the consumption sentiment in 3Q. A total of HKD5,000 cash voucher per resident stimulus is equivalent to HKD36bn or 11% of the 2020 retail sales value. The seasonally adjusted unemployment rate fell from an 18 year-high of 7.2% in Dec20-Feb21 to 4.5% in 3Q. Given the favourable labour market environment, we have revised our year-end jobless rate forecast from 4.8% to 4.0%. For 2022, we expect it will drop further to the historic low of 2.8% before the Covid outbreak.

Export growth slowed further

Growth of outward shipment slowed to 20.5% YoY in 3Q from 14.3% in 2Q, largely dragged by the slower growth in September amid Mainland China’s electricity shortage. Exports to Mainland China slowed from 30.0% in August to 11.2% in September. Although China’s export-led industrial activities are likely to moderate in the months ahead, those to the Asia and advanced economies should improve further amid a recovering global economy. Those to Singapore, Taiwan Province, and South Korea rose by 86.3%, 53.6%, and 58.8% respectively. Those to the US and major European economies also recorded double-digit growth.

Ultra-low short-end interest rates will support investment

Gross fixed capital formation slowed to 11.0% YoY in 3Q from 23.9% in 2Q due to a weakened investment sentiment amid regulatory crackdown across various sectors in Mainland China. Yet, the recovering economic condition as well as the ultra-low interest rate environment should support the investment sentiment down the road (see “HKD Rates - HIBORs to remain anchored”). Liquidity stayed flush, with the Aggregate Balance staying above HKD400bn, compared to the pre-COVID period of HKD54bn. 1-M HIBOR stayed low at around 0.06%-0.07%. The commenced Greater Bay Area Wealth Connect, with the initial quota at RMB150bn for both Northbound and Southbound routes, will add fresh liquidity to the HKSAR banking system. The latest government initiative of developing the New Territories North will also boost public and private investment in the property sector. The Chief Executive Carrie Lam targeted to provide more than 900,000 apartments in the next decade.

Residential price growth to hold steady

Residential property prices in the secondary market retreated by 2.3% from the historical high last seen in mid-September after pent-up demand was somewhat fulfilled. The consolidation was also attributed to the government’s latest effort of increasing land supply. The number of transactions dropped by 13.8% QoQ. We have downgraded our property price forecast this year from 7.5% to 5%. Yet, we think the property price movement will hold steady in the near term as the demand-supply imbalance remains. The number of private residential property in commence and completed is expected to drop by 10% and 25% this year. According to Hong Kong SAR Government, the potential land supply for the next 3-4 years stays at around 94,000 flats. The New Territories North project is also far from execution. Also, the return of Mainland investors after border reopening next year will fuel the uptrend again. In 2022, it will rise further by 3%.

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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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