Economic Update


Faster Pace of Rate Hike May Strengthen HKD

Overnight, the Federal Open Market Committee (FOMC) announced it would raise the target range for the Federal Funds Rate to 0.5-0.75%. In addition, members of the FOMC indicated a tendency to raise interest rates at a faster pace compared to three months ago (see Table 1). We have taken this opportunity to elaborate our view of the economy and how it may be impacted by the rate hike.

Economic Outlook

As an open economy, Hong Kong relies heavily on international trade, with two-way trade flows representing 423% of the city’s economic output in real terms as of the end of the third quarter. Looking ahead, while the downward pressure on merchandise trade could be lifted slightly, the relatively dejected performance of services trade – particularly travel services – should stay.

Among others, the above-100 reading (100.9) of the World Trade Organisation’s World Trade Outlook Indicator suggests that global trade will see positive growth in the near term, which could ease the cyclical downward pressure on merchandise trade. This argument would receive strong support if our major export destinations (i.e. the Mainland and the U.S.) maintain their growth momentum (see Chart 1).

As for service exports, owing to the enhanced efforts of our neighbours on tourism, we are barred from being optimistic despite a lower comparable base (as illustrated in our 17 October Economic Update). Moreover, the recent strength of the Hong Kong Dollar against the other Asian currencies, including the RMB, would continue to hurt our attractiveness as a tourist destination. If these trends linger, it will lead to mounting pressure on tourism-related sectors, including but not limited to the retail, food and beverage, and hotel industries. All the more, as these three industries are employing some 620,600 people, further risks could be spread through an uptick in unemployment and decline in income, among the other channels.

Indeed, consumption is still posited to grow, notwithstanding the lower growth rate. While we expect the full employment situation to continue in our base case scenario, we are becoming increasingly more conservative about household consumption growth. We take note that the aggregate employment has already fallen moderately from the peak as a result of the lower job figures in the trading and retail sectors, even though total employment is still at a high level (close to 3.5 million, excluding domestic workers). At the same time, while earnings continue to grow year-on-year, the pace has been on a declining trend, with median income up only 3.4% YoY in the third quarter (see Chart 2). Such a declining trend aligns with some professional human resources bodies’ salary forecasts and supports a prudent projection. 1

As for investment, given the favourable base effect, growth will likely be maintained in the near term (see Chart 3). On the other hand, whereas business sentiment seems to have turned slightly more positive as shown in the Government’s Business Tendency Survey (BTS), it is noteworthy that it could be short-lived because businesses tend to be more upbeat as holiday seasons approach.2 Particularly, investment sentiment could become conservative with the cost of borrowing set to increase in 2017. Therefore, we remain cautious about the outlook of investment (i.e. gross fixed capital formation).


Following the Fed’s announcement, the Hong Kong Monetary Authority raised the base rate by 25 basis points to 1%, reflecting the same magnitude of adjustment by the Fed. Nevertheless, as suggested in an earlier article, banks are unlikely to follow such an action given the abundant liquidity in the system (30 November Economic Update).

All in all, we do not expect major changes to our forecast as a result of the more hawkish tone of the FOMC communiqué, which shows that members are now expecting a faster pace of interest rate adjustment. Notwithstanding the above, the signals from the FOMC could add momentum to the recent strength of the Hong Kong Dollar, which could weigh on the tourism-related sectors and will continue to be a key factor that holds us back from being more optimistic.


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