The Hong Kong economy registered 2.7% YoY growth in 1Q24, with sequential growth accelerating from 0.2% QoQ in 4Q23 to 2.3%. Stronger-than-expected improvement was largely driven by net export of goods and services. However, the strong HKD exchange rate encouraged outbound travel and eroded the Mainland tourists' spending power. Investment also stayed tepid amid elevated HKD rates. As the HKD rates are likely to stay “higher-for-longer” alongside reversing Fed Fund Rate cut expectation, growth momentum will likely remain modest in 2H24. We maintain our full-year GDP forecast at 2.0% YoY.

Export

Outward shipments demonstrated resilience, buoyed by rising demand for electronics from AI technology. Hong Kong exports of goods recorded 6.7% YoY growth in 1Q24, with that to China jumped by 20.2% in value terms. Air cargo movement also recovered to pre-COVID level. Looking ahead, Hong Kong stands to benefit from both improving conditions in Mainland China and rising external demand, suggested by expanding manufacturing PMIs of Hong Kong's major trading partners. Meanwhile, imports rose at a slower pace of 3.2% due to weak domestic demand. Net exports thereby contributed to 3.2%ppts of the headline growth.

Consumption and tourism

Private consumption growth contributed 69% of total GDP and slowed to 1.0% YoY in 1Q24 from 3.5% in 4Q23. This was due to sluggish Mainland tourist spending and domestic spending. The higher growth in services exports in comparison to services imports also depicted the same story.

While the daily average Mainland tourist arrivals saw a sequential improvement, it was still 31% below 2018’s average in 1Q24.  After all, CNY further depreciated 1.8% against HKD. The weaker CNY exchange rate has been reducing the spending power of Mainland tourists. Tourist-related shops such as department stores and luxury products remained 38.9% and 35.6% below the 2018 level in February. On the first day of the Labor Day Holiday, the Mainland tourist arrivals were 7% below the 2017-2018 average.

The strong HKD continued to encourage outbound tourism. This was evident during the Easter Holidays, when the daily average Hong Kong resident departure exceeded the 2018 level by 21%, keeping Hong Kong’s retail sales value in 1Q24 at 18% below the 2017-19 average. Conversely, Shenzhen’s total retail sales value surpassed the 2017-19 average level by 82% for the comparable period.

Labour market: The job market saw some deterioration, attested by the 1Q24 unemployment rate released. The jobless rate rose to 3.0% in 1Q after hovering at a pre-COVID low of 2.8-2.9% for nine months. The increase was broad-based. Among all sectors, retail, accommodation, and food services saw a noticeable increase of 0.4% ppts to 3.8%. Jobless rates in construction and financing & real estate sectors were on an upward march amid weak asset market performance. The weaker labour income will drag the consumption sentiment ahead.

Investment

Gross Domestic Fixed Capital Formation (investment, GFCF) slowed from 17.5% YoY in 4Q23 to 0.3% in 1Q24, amid weak borrowing activities. Total loans fell by 5.4% YoY in March, largely driven by the decline in real estate, financial, and stockbrokers. In contrast, borrowing from information technology sector grew 13.4% YoY amid government initiatives to enhance innovation and technology ecosystem as mentioned during 2024-25 Budget.

Property

Pent-up demand in the residential market was released after the government removed all demand-management restrictions. Real estate developers seized the opportunity to offer aggressive discounts to liquidate unsold units. Unsold inventory eased by 6.9% from a 20-year high in December to 21,363 units in March. 

Yet, the improvement will likely be short-lived.  Residentials are bearing the brunt of high rates. After all, the improving rental yield remains far below the risk-free fixed deposit rates. Elevated effective mortgage rates are also dampening homebuyers’ affordability. The cases of negative mortgage loans rose 27% QoQ to 32,073 cases in 1Q24, the highest since 1Q2004.

Grade A office vacancy rose to all-time high of 13.1% in March. Corporates remained cost-conscious amid global economic uncertainties. Relocation was mainly driven by corporate downsizing or office consolidation. Looking ahead there will be a consistent flow of new office supply across the board in Hong Kong. Against this backdrop, overall office vacancy will likely stay elevated.

Deposits and loans

The allure of high fixed deposit rates and rising jobless rates prompted consumers to save. HKD rates remained elevated amid the potential delay of the US interest rate cut cycle. Overall deposits grew by 4.4% YoY in March, reaching HKD 16.2 trillion, close to the historical high in December last year. Consumers shifted cash from demand and savings deposits to time deposits. Time deposits, as a proportion of total deposits, increased to 59.6% in March from 34.3% in October 2021.

Inflation: CPI growth decelerated from 2.1% YoY in February to 2.0% in March. Weak inbound tourism and domestic consumption keep inflation at bay. The higher jobless rates will eventually curb residential rents and labour costs. Strong HKD exchange rates will continue to restrain import costs. 

Conclusion

As the HKD rates will likely stay “higher-for-longer” alongside reversing Fed Fund Rate cut expectation, this is expected to have implications on domestic consumption and investment sentiment will remain tepid. Despite some support from exports, we maintain our full-year GDP forecast at 2.0% YoY.


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