Hong Kong's economic growth slowed from 3.2% YoY in 2Q to 1.8% in 3Q as the low base effect faded. On a sequential basis, it fell 1.1% QoQ. Consumption remained subdued due to strong outbound travel and weak tourist spending. Investment also moderated amid high funding costs. Outward shipments slowed on softening external demand. 4Q GDP growth should hold steady at 2.0%, thanks to the coalescence of forceful stimulus from Beijing and the Fed's rate cuts. We have upgraded the full year forecast from 2.0% to 2.4%.

1. Exports

External sector saw signs of weakness.

Mirroring China's export slowdown, Hong Kong's real goods exports fell to 3.9% YoY in 3Q from 7.5% in 2Q. Exports to major partners like India, Taiwan and UAE saw double-digit contraction in value terms in September. Exports to the US also dropped 2.3%. On a bright note, shipments to Mainland China were resilient at 12.3%, buoyed by electronics demand. Meanwhile, import growth moderated from 3.4% in 2Q to 2.6% in 3Q on weak domestic demand. As a result, net exports contributed 2.3 percentage points to Hong Kong's headline growth.

2. Consumption and tourism

Private consumption fell further, down 1.4% YoY in 3Q after declining 1.6% in 2Q. Domestic consumption and inbound tourist spending were constrained by substantially lower Mainland prices compared to Hong Kong. Despite summer holidays, daily average mainland tourist arrival in October was 25% below 2018's average. Tourist-related shops like department stores and luxury goods saw August sales 43.2% and 44.8% below 2018 levels respectively.

The strong HKD continued driving outbound tourism. Daily average resident departures exceeded 2018 levels by 22% in October, while the retail sales value was 23.4% below 2018 levels in the first eight months. The higher growth in services imports versus exports depicted the same story.

On a positive note, full employment will render some support. The unemployment rate held at 3.0% for seven straight months through September. Returning labor will also support medium-term consumption demand.

3. Investment

Gross Domestic Fixed Capital Formation (investment, GFCF) decelerated from 4.1% YoY in 2Q24 to 3.7% in 3Q24 alongside high funding cost. 3M HIBOR hovered around 3.9-4.8% in the quarter. Total loans fell 3.1% YoY in September, dragged by real estate. While financial services loans fell 7.5%, stockbroker loans jumped 21.2% amid equity market rally. Transportation loans grew 8.4% on recovering aviation capacity. Information technology loans rose 3.5% YoY on government tech upgrades.

4. Deposit

Overall deposit growth accelerated from 8.1% YoY in August to 8.7% in September, indicating capital inflow. M2 growth also picked up from 1.9% in August to 3.0% in September. M1, or demand deposits, grew even faster at 3.2% after declining for 29 months. Reflecting this, the fixed deposit (FD) to current and savings account (CASA) ratio fell from 59.3 in June to 58.2 in September. Such changes can be attributed to the interest rate downcycle and improving liquidity demand from asset markets.

5. Property

Overall rents rose 5.9% in the first 9 months of the year, reflecting increasing housing demand from overseas students, returning expatriates, and incoming foreign talent. In the first half of 2024, 60,878 applications were approved under various talent programs.

Coupled with rising rental yields, the stronger leveraging demand from recent relaxation of the loan-to-value (LTV) and debt-servicing ratios (DSR) will boost investment demand. The average residential rental yield increased from 2.64% in February to 2.92% in August. Ongoing Fed rate cuts will help narrow the negative carry between rental returns and risk-free deposit rates. In fact, secondary market sales transactions jumped to 92 units per week in October from a 48 units weekly average in 3Q before the rate cuts.

Yet, excess property supply will likely keep prices in check. Developers are adopting flexible pricing to liquidate unsold inventory. Note unsold units returned to the post-SARS high of over 22,000 in 3Q.

6. Inflation

September’s CPI rose to 2.2% YoY from 1.5% in June, driven by rising rental costs. Note that housing accounts for 40% of the CPI basket. However, overall inflation is constrained by softening food prices, reflecting subdued domestic consumption sentiment.

7. Conclusion

The 3Q GDP was weighed by high funding costs, strong HKD, and soft external demand. However, the economic condition should stabilize on entering 4Q, thanks to the commencement of US rate cuts and decisive stimulus from Beijing. Domestic consumption and inbound tourism will improve on a weaker HKD. Investment sentiment and loan growth will also bottom out on lower HKD rates.

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