A double whammy of the China-U.S. trade war and the four interest rate hikes by the U.S. Fed had a notable impact on Hong Kong towards the end of 2018. This clearly demonstrates how our open economy is exposed to the external environment. The city’s economic growth fell from 4.6% year-on-year in the first quarter of 2018 to 1.3% in the final quarter (Figure 1). For the whole year of 2018, Hong Kong’s real GDP growth was 3%, down from 3.8% in 2017.
Notwithstanding the lingering trade war, Hong Kong’s external sector was largely resilient during most of last year, thanks to the front-loading activities of exporters, who wanted to avoid paying higher tariffs later. However, the rush to front-load shipments faded towards year-end. Accordingly, Hong Kong’s merchandise exports dropped 0.2% year-on-year in Q4, its first quarterly decline since Q1 of 2016.
Growth in private consumption also moderated throughout 2018, as asset price corrections and the resulting negative wealth effect dragged consumption sentiment down (Figure 2). That being said, private consumption was buoyed by a strong labour market. The unemployment rate stayed at around 2.8%, its lowest level in more than 20 years.
Gross domestic fixed capital formation, which covers expenditure on building and construction as well as investment, fell by 5.4% year-on-year in Q4 (Table 1). This component of GDP is generally more volatile and the slump in Q4 was mainly due to the completion of the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link and the Hong Kong-Zhuhai-Macao Bridge, which opened in September and October 2018 respectively, as well as the decline in the costs of ownership transfer amid a cooling property market.
Inbound tourism performed strongly in Q4, thanks to the launch of the major transport links between Hong Kong and Mainland China (Figure 3). For the whole year of 2018, visitor arrivals reached a record high of 65.1 million, representing an 11.4% growth. To put this number into perspective, visitor arrivals to the United States and Japan were 77 million and 29 million, respectively, in 2017.
Mainland visitors, who accounted for 78% of the total, rose 14.8% in 2018. Of these, overnight visitors increased 7.4% while same-day visitors rose by 20.1%. Although the latest data for the average spend per Mainland overnight tourist in 2018 has not been released yet, the number is likely to follow the continuing downward trend, given that the weakness of the RMB will have weighed on their purchasing power.
The proportion of same-day visitors rose from 52% in 2017 to 55% in 2018, while that of overnight visitors dropped from 48% to 45%. The increased propensity for day trips should temper any excitement about the overall increase in visitor numbers. This is because visitor arrivals are set to rise further in 2019 due to the opening of both the Express Rail Link and the bridge to Macao and Zhuhai. Considering the fact that day-trippers normally spend much less than overnight visitors, we should aim to attract tourists who are more willing to spend instead of simply boosting the overall visitor figure.
Business sentiment in the city turned much more cautious towards the end of last year, as reflected in the results of the Business Tendency Survey conducted by the Census and Statistics Department (Figure 4). The proportion of large enterprises expecting a weaker business situation in Q1 of 2019 outweighed the proportion of those expecting a better situation by 12 percentage points (net balance of -12), compared with the positive net balance of 2 percentage points in the previous quarter.
Should Hong Kong maintain its positioning as a highly externally oriented economy, it must accept its fate of being vulnerable to exogenous changes in the global arena. From the perspective of public finances, the Hong Kong Government may have reason to feel comfortable, as its cash pile in fiscal reserves is estimated to increase by $58.7 billion for 2018-19, reaching $1,161.6 billion by the end of March this year.
The development of the Greater Bay Area should be a key driver of Hong Kong’s growth in the coming decades, but it is not going to change the city’s vulnerability to fluctuations in the external environment.
Few can deny that Hong Kong lacks effective tools to respond promptly to economic changes, especially when the Hong Kong Monetary Authority cannot adopt discretionary monetary management under the currency peg system.
While the Basic Law calls for the Hong Kong Government to achieve a balanced budget, a framework of counter-cyclical measures could be useful to help stabilize the economy. This is easier said than done and may require some imagination as, for one thing, our ageing society is already putting pressure on social welfare and health services expenditure.
One strategy could be to establish a formal mechanism for using part of Hong Kong’s fiscal reserves to even out the fluctuations in the economy. In this regard, we are looking forward to hearing the Financial Secretary’s thoughts when the Government provides more details on its Budget initiatives.