The Hong Kong economy expanded by 3.5% year-on-year (in real terms) in the second quarter of 2018, following a 4.6% growth in the first quarter. It was also the seventh consecutive quarter of growth that was above the average annual growth rate of 2.7% over the past ten years (Figure 1).
Nonetheless, on a quarterly basis, the economy contracted by 0.2% against a high base of comparison in the first quarter during which a 2.1% growth was posted.
Domestic demand remained strong in the second quarter. As a low unemployment rate continued to underpin consumer sentiment, private consumption expenditure grew by 6.1% year-on-year. Overall investment spending in terms of gross domestic fixed capital formation rose by a modest 0.4%, down from the previous quarter’s 4.2%.
Total export of goods grew 4.6% year-on-year, but the momentum seemed to wane towards the end of the quarter. Exports of services expanded by 6.1%, with inbound tourism continuing to register double-digit growth.
With the trade tensions between the Mainland and the U.S. intensifying and, in the process, stoking uncertainties, we expect Hong Kong’s economy to slow in the second half of the year. While our members generally did not experience significantly adverse impacts, they have become more downbeat compared to earlier this year.
This is consistent with the latest results from the Census and Statistics Department’s Quarterly Business Tendency Survey in that business sentiment among large enterprises in Hong Kong has turned slightly more cautious. The share of large enterprises expecting a better business situation in the third quarter of 2018 exceeded that of those expecting a weaker one by 6 percentage points, slightly lower than the 8 percentage points recorded in the second quarter.
Reflecting the market’s concerns over the deepening uncertainties, the Hang Seng benchmark index has gone down by more than 10% from its peak in late January. The asset market correction and the associated negative wealth effect could dampen consumer sentiment.
Meanwhile, a stronger recovery in the U.S. and a steady increase in inflation mean that the Federal Reserve will very likely raise interest rates further at its September meeting, putting pressure on local banks to follow suit thereby increasing borrowing costs. The market implied probability of the Federal Reserve raising its target interest rate next month is currently at around 90%.
The Hong Kong dollar has appreciated by over 9% against the RMB since the end of March. The recent weakness of the RMB could undermine the purchasing power of the Mainland tourists, who accounted for 77% of all visitors to Hong Kong in the first half of the year.
The individual impact of some of the factors stated above may not be significant, but if considered in aggregate they could have dire consequences and, as such, a continuation in our robust growth should not be taken for granted.
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