Hong Kong's economy registered a stronger-than-expected 3.3% YoY growth in 2Q24. Strong net exports of goods and services drove the outcome. On a sequential basis, it grew by 0.4% QoQ. Outward shipments showed resilience in 2Q, buoyed by rising demand for electronics. However, consumption remained subdued due to strong HKD encouraged outbound travel and eroded mainland tourists' spending power. Investment also remained tepid amid relatively high funding costs. 2H24 growth will likely remain modest as the base effect from reopening boost fades. We maintain the 2024 growth forecast at 2.0%.

Exports

The exports sector was a rare bright spot. Buoyed by rising demand for electronics, goods exports were up 7.6% YoY in 2Q24 in real terms. In value terms, exports to China and ASEAN were up 8.7% and 7.2% respectively. Meanwhile, imports in real terms increased at a more modest pace of 3.4% due to weak domestic demand. As a result, net exports contributed 3.7% ppts to Hong Kong's headline economic growth rate.

Consumption and tourism

Private consumption was down 1.6% YoY in 2Q24, the first contraction since COVID. Domestic consumption and inbound tourist spending were restrained by substantially lower prices in the Mainland vis-à-vis Hong Kong.

The daily average Mainland tourist was 41% below 2018’s average in 2Q24. Tourist-related shops such as department stores and luxury products saw May sales 38.4% and 34.0% below their 2018 levels.

Strong HKD continued to encourage outbound tourism. Daily average resident departure exceeded 2018 level by 21%, keeping Hong Kong’s retail sales value in first five months at 22% below 2018-19 average. Conversely, total retail sales value in Shenzhen surpassed the 2018-19 average level by 72% for the comparable period. Meanwhile, Hong Kong became Japan’s 3^rd largest tourist group in terms of spending. The total trip expenditure per Hong Kong visitors increased from JPY155 thousands in 2018-19 to JPY269 thousands in 2Q this year. The higher growth in services imports in comparison to services exports also depicted the same story.

On a brighter note, the full employment situation will render some support to retail sales. Unemployment rate remained unchanged at 3.0% for four consecutive months through June. Return of labor will also render some support to consumption demand over the medium-term.

Investment

Gross Domestic Fixed Capital Formation (investment, GFCF) accelerated from 0.3% YoY in 1Q24 to 6.0% in 2Q24, largely driven by low base effect. Investment sentiment remained tepid amid high HKD rates. Total loans fell by 5.0% YoY in June, dragged by the decline in real estate, financial, and stockbrokers. In contrast, borrowing from utilities and information technology sector grew 10.3% and 7.0% YoY amid government initiatives to upgrade technology ecosystem and infrastructure as mentioned during 2024-25 Budget.

Property

Pent-up demand in the residential real estate market was short-lived, dissipating quickly after the government removed all demand-management restrictions in February. Primary market transactions cooled to 574 units, lower than the pre-budget level seen in January-February. Excess supply of property will likely cloud property prices in the near-term. Real estate developers took the opportunity to adopt flexible pricing to liquidate unsold inventory. Note that the stock of unsold units stayed above 20,000 units for 12 months.

On home buying demand, investment sentiment will continue to be restrained by negative carry, meaning the improving rental yield remains far below risk-free fixed deposit rates. Overall deposits grew by 4.4% YoY in June, reaching a record high of HKD 16.7 trillion. Elevated effective mortgage rates are also dampening homebuyers' affordability.

Overall housing demand remain stable. Home buying demand is transforming into leasing demand. This is evidenced by the rising rental yield. Overseas students, returning expatriates, and incoming talents are adding impetuts to the rental market.

Corporate vacancy rate rose to a new high of 13.6% in June. Flight to quality is the name of the game, with non-core districts underperforming. Looking ahead, influx of new office supply will add further downward pressure on rental returns.

Inflation

Inflation picked up to 1.5% in June, due to decreased Government electricity charge subsidies versus last year. July's transportation fare increase will likely drive higher 3Q CPI. Yet, consumer prices should stay below 2% in 2H24 as public housing rent remains modest with the fading base effect.

Conclusion

Despite some support from exports, we maintain our full-year GDP forecast at 2.0%. Domestic investment and consumption are abating due to high HKD rates. Inbound tourism will be adversely affected the weak CNY exchange rate along with the PBOC rate cuts.



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