Economic Update


Near-term economic pressure mounts for Hong Kong

People who like surprises may continue to enjoy themselves in 2019 as global uncertainty looks set to continue. British Prime Minister Theresa May’s Brexit deal has just suffered a landslide defeat in Parliament, meaning that the United Kingdom has entered a new and heightened phase of uncertainty. Growth in investment in the U.K. has plummeted compared with the European Union. Caution will still be the best approach for businesses, and we may need to wait for some time before the growth in investment in Britain and its European neighbours converges again (Figure 1).

Anyone hoping to hear good news on the Hong Kong economy may be disappointed when the Financial Secretary announces the 2018 GDP figures in late February.

Hong Kong’s trade sector was relatively resilient for the most part of 2018, notwithstanding the ongoing China-U.S. trade war. However, like a mirage, when you get closer to these figures, you find nothing substantiating them.

The trade growth was underpinned by the front-loading activities of exporters, who wanted to avoid higher tariffs. So trade growth was distorted upward, but the rush to front-load shipments has apparently now started to fade. Hong Kong’s merchandise exports dropped by 0.8% year-on-year in November after a 14.6% growth in October 2018. This was the first decline since January 2017.

Although December data is not available yet (to be released on 28 January), it is likely that Hong Kong might finish the last month of 2018 with an even worse performance in the external sector.

Early data of air cargo throughputs at Hong Kong International Airport adds to the air of pessimism. In December, air cargo movement declined by 5.2% year-on-year. Mainland Chinese exports, which tend to synchronize with Hong Kong’s exports, contracted 4.4% in December, the steepest fall in two years (Figure 2).



Meanwhile, our retail sector is also facing strong headwinds. The value of sales of jewellery, watches and clocks, and valuable gifts – a yardstick for spending by Mainland tourists – registered its first decline since June 2017 and the steepest since January 2017 (Figure 3).



Softening demand for big-ticket items by Mainland consumers -- as evidenced by China’s sixth consecutive month of decline in sales of passenger vehicles -- is unlikely to post a meaningful rebound in the first quarter amid lingering trade war concerns. The drop in Mainland consumption sentiment is no good news for Hong Kong’s retailers ahead of the Chinese New Year shopping season. Mainland visitors account for three in every four tourists in Hong Kong, and the jewellery, watches and clocks, and valuable gifts category contributes one-sixth of total retail sales in the city.

Fortunately, the U.S. Federal Reserve is now more likely than months ago to slow its pace of monetary tightening, after a total of four rate hikes in 2018. The probability of the Fed not changing the target policy rate in 2019 is currently around 70%, according to the tracking tool for the futures market, compared to 45% just a month ago. This could perhaps give Hong Kong’s economy some breathing space.



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