Hong Kong: Speedy recovery

Hong Kong’s real GDP held up at 7.5% YoY in 2Q21 from 8.0% in the previous quarter.
Samuel Tse02 Aug 2021
  • Real GDP grew by 7.5% YoY in 2Q21 from 8.0% in the previous quarter
  • We expect the city to reach herd immunity by the end of this year
  • We have revised up our 2022 GDP forecast to 3.0% from 2.3% on the assumption…
  • … that China re-opens its borders early next year
  • Property prices might exceed our 7.5% growth forecast in 2021
Photo credit: AFP Photo

Headline growth still high

Hong Kong’s real GDP held up at 7.5% YoY in 2Q21 from 8.0% in the previous quarter. On a seasonally adjusted QoQ basis, it fell by 1.0% mainly reflecting some slowdown in exports of goods from the exceptionally strong growth in 1Q. We have revised up our 2022 GDP forecast to 3.0% from 2.3% on the assumption that China re-opens its borders early next year.

Consumption stabilizing

Private consumption growth improved further from 2.1% YoY in 1Q to 6.5% in 2Q. Retail sales rose by 10.4% in May. Discretionary spending such as jewelry witnessed more appreciable growth of 55.1%, a sign of buoyant local consumption sentiment. CPI stayed positive at 0.7% in June; clothing saw the most apparent acceleration of 3.2%. Vaccination progress picked up after corporates provided incentives e.g. lucky draws for properties. To date, over 30% of the population are fully vaccinated. We expect the city to reach herd immunity by the end of this year. Looking ahead, more relaxation in local social distancing rules should boost the recovery. The issuance of HKD5000 worth of cash vouchers, equivalent to HKD36bn or 11% of the 2020 retail sales value, should boost the spending power ahead. The seasonally adjusted unemployment rate fell from an 18 year-high of 7.2% in Dec20-Feb21 to 5.5% in 2Q. That of the retail, accommodation and food services sector dropped from 11.1% to 8.5%. The overall jobless rate is forecast to drop from the current level to 4.8% in 4Q.

Exports growth remained strong

Exports of goods rose by 20.3% YoY in 1Q and 33.0% in June. Outward shipment to the Mainland China soared by 36.6% in June amid its fully recovered domestic economy. Although China’s export-led industrial activities are likely to moderate in the months ahead (see “China: Slower headline growth; policy in neutral gear”), those to the advanced economies such as US, Germany, and Netherland should improve further amid a recovering global economy (US 2Q GDP: 6.5% QoQ). The ongoing global vaccination progress will support Hong Kong’s re-exports down the road.

Fiscal deficit to narrow

Against this backdrop, the government is likely to hold back further fiscal stimulus. Fiscal balance is expected to remain in deficit at 3.6% of GDP in FY21/22 from 9.4% in the previous year. Government spending growth eased from 7.0% in 1Q21 to 2.9% in 2Q. Fiscal reserves stabilized at HKD907bn in May, 7.1% higher than the lowest reading amid COVID in Oct 20. As the government has already front-loaded the i-bond (retail government bond) issuance in June, the government bond issuance is expected to slow in the months ahead.

Investment will be supported by the ultra-low short-end rates

Gross fixed capital formation growth accelerated to 23.7% YoY in 2Q from 4.8% in 1Q, alongside the recovering economic condition as well as the ultra-low interest rate environment. Based on the last US tapering cycle in 2014-15, HIBORs will remain anchored before an actual US rate hike (likely to happen in 2023) (see “HKD Rates - HIBORs to remain anchored”). Liquidity stayed flush. Aggregate Balance, stayed at HKD457bn, compared to the pre-COVID period of HKD54bn. Even the stock market was volatile amid the regulatory storm of Chinese tech and education listed companies, 1-M HIBOR hovered at zero-bound of 0.073%-0.088% last week, with the spread against its LIBOR counterpart largely neutral. Overnight HIBOR, an indicator of market volatility, also stayed anchored at 0.046% or 3bps below LIBOR. If market sentiment continues to improve, capital inflow will return soon. The upcoming Greater Bay Area Wealth Connect, with the initial quota at RMB150bn for both Northbound and Southbound routes, will add fresh liquidity to the Hong Kong banking system.

Luxury property prices to play catch up

Residential property prices in the secondary market rose by 7.1% YTD and was only 0.9% below its historical high in June 2019. This was attributed to pent-up demand from a more stable COVID situation. The number of transactions soared by 21.3% QoQ. Among all, the price and transactions of the luxurious market / large units will continue to see more appreciable catch-up as border against Mainland China is in-sight. Looking ahead, the demand-supply imbalance will continue to support home prices. According government’s projection, the medium-term (3-4 years) primary market supply increased by only 3,000 units QoQ to 96,000 units. Land sales stagnated somewhat. There will be 18,230 units under construction to be completed this year. Yet, over 70% of these have been already sold. There is upside risk to our 2021 property price forecast of 7.5% growth.

To read the full report, click here to Download the PDF.

Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港

Subscribe here to receive our economics & macro strategy materials.
To unsubscribe, please click here.

The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.