Hong Kong: Upward revision of HK outlook

Assuming the border can be gradually re-opened by end of 2Q / early 3Q, the GDP forecast is upward revised from 4.0% to 6.0%.
Samuel Tse04 May 2021
  • GDP rebounded by 7.8% YoY in 1Q
  • We have revised 2021 growth forecast to 6% (from 4%)
  • An emerging downside risk is possible…
  • … renewed restriction on mobility if the Covid variants begin to spread locally
  • Property price of the luxurious segment will continue to catch up with the mass market
Photo credit: Unsplash

Strongest headline growth in the past decade

GDP rebounded by 7.8% YoY in 1Q21 from -2.8% in 4Q20 as the last wave of COVID outbreak was largely manageable. On a seasonally adjusted QoQ basis, it improved by 5.3%. Assuming the border can be gradually re-opened by end of 2Q / early 3Q, the GDP forecast is upward revised from 4.0% to 6.0%.

Consumption saw signs of stabilization

Private consumption finally rebounded by 1.6% YoY in 1Q, after falling straight for 6 quarters. The improvement was mild amidst lockdown in first half of 1Q. Yet, retail sales rose by 30.0% in February. Performance of discretionary spending such as clothing and jewelry saw more appreciable growth of 89.6% and 113.7% respectively, pointing to a buoyant local consumption sentiment. CPI returned to positive territory after recording a half-year long deflation. Vaccination progress started picking up after the jab was available for all citizen aged 16 yea-old or above. The local “vaccine bubble”, which allows bars and restaurants to open for longer hours and larger groups, should stimulate the recovery in the months ahead. The seasonally adjusted unemployment rate fell from 18 year-high of 7.2% in Dec20-Feb21 to 6.8% in 1Q. That of the retail, accommodation and food services sector dropped from 11.1% to 10.7%.

Tourist demand is also expected to revive on the back of gradual re-opening of border. Exports of services also narrowed to -8.7% YoY from the 28.8% drop in 4Q20. The government has announced the plan of extending “Come2hk” scheme from Guangdong Province to other provinces in Mainland China. “Travel bubble” agreement with Singapore and other countries is also in pipeline. Hotel occupancy rate and room rate, which stabilized at 52% and HKD704 per night, should bottom out soon.

However, the recovery in retail sales is likely to be gradual. For instance, monthly visitor arrivals to Macau in March only returned to 24.5% of its pre-crisis level in December 19 even the border was reopened to Mainland China in 2H20. That for the week-long Labour Holiday only recovered to 12.5% of the 2019 level (first two days).

Further upside in exports

Exports of goods rose by 30.6% YoY in 1Q and 26.4% in March. Outward shipment to the Mainland China soared by 31.3% in March amid its fully recovered production capacity. China’s industrial production rose by 24.5% in 1Q. Leading indicators such as rising oil refineries run-rate inventory also pointed to steady factory production ahead. Those to the advanced economies such as US, Germany, and Netherland also held up well. Such promising trend is expected to continue amid the ongoing global vaccination progress.    

Fiscal deficit remains

According to the Hong Kong Government Budget, the fiscal balance is expected to remain in deficit at 3.6% of GDP in FY21/22. Government spending increased by 6.7% YoY in 1Q, compared to 6.1% in 4Q20. Fiscal reserve stayed below HKD928bn, 26% below its peak in early 2020. As such, further stimulus requires the government to issue government bonds. In fact, the government bond issuance rose by 8.0% YoY YTD. Couple with the potential funding needs for infrastructure projects for further integration with the Greater Bay Area such as “Lantau Tomorrow”, the government bond issuance is set to increase. This will in turn add upward pressure to the long-end government bond yields.  

Low short-end rates to buttress investment 

While the HKD yield curve is expected to steepen further alongside USD rates, the short-end rates should stay low in the near-term. In the last FOMC meeting, the FED stated that US inflation is largely “transitory”, and a “substantial further progress” is needed to be seen before the pace of bond buying gets changed. Accordingly, both 1-M HIBOR and LIBOR stayed below 0.1% (10Y UST yield held stable at 1.6% level). Looking ahead, the return of capital inflow through Stock Connect, as well as the upcoming Southbound Bond Connect and Wealth Connect will bring flush liquidity to the Hong Kong banking system and thereby keeping the short-end rate low.

Coupled with the business optimism, investment sentiment is expected to stay buoyant. Gross fixed capital formation grew by 4.5% YoY in 1Q from 3.6% in 4Q.  Loans as a percentage of GDP for the 5th quarter from the outbreak stayed high at 431%, compared to 255% and 190% during the Asian Financial Crisis and Global Financial Crisis.  

Property prices for large units to catch up

Residential property prices on the secondary market rose by 3.9% YTD and is only 3.8% below its historical high in June 2019. Given the release of post-COVID pent-up demand and ultra-low interest rate environment, transaction (in value terms) soared by 29.1% MoM. Among all, the price of the luxurious market saw more appreciable catch up as investors are eyeing on the return of Mainland investors after the re-open of border. Primary market was also buoyant, with transaction value went up by 17.6% MoM. THE SOUTHLAND, developed by Road King and Ping An Real Estate, went on sales last week. Given it is the first large scale development alongside MTR station on the Hong Kong Island over decades, all 240 units were snapped at average psf of HKD31,652. This also pointed to the shift of investor’s focus from the mass market to the luxurious segment.

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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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