The Hong Kong economy expanded by 4.3% YoY in the first quarter of 2017, the fastest quarterly growth in six years since 2Q2011 (see Chart 1). After bottoming out from its trough in 1Q2016, growth momentum continued its upswing in the last quarter, supported by both domestic and external economic conditions.
Growth momentum remained intact
Domestic demand, driven by consumption and investment activities, was the biggest driver propelling the economy (see Chart 2). In particular, investment activities remained dynamic in the quarter and expanded 6.4% YoY, contributing some 1.3% to the GDP growth. Such an upsurge was due in part to the strong performance of the property market, with activities in both the private (+5.3% in real terms) and public (+18%) sectors growing rapidly. Meanwhile, despite a marked increase in public investment (+17.1% in real terms) in “machinery, equipment and intellectual property products,” investment made by the private sector was negative (-14.1%). The latter, in our view, shows that businesses remain conservative about expanding their capital expenditure structure.
On the other hand, the support for domestic consumption is deeply rooted, highlighted by the tight labour market conditions. The unemployment rate went south and lowered to 3.2% in the first quarter, while the underemployment rate remained at the lowest level since 1997 (1.2%). More importantly, the unemployment situation in the tourism related sectors (i.e. retail, accommodation and food service sectors) continued to recover in recent months, whereby the unemployment rate of these sectors improved to 4.7% in March, which is closer to the average unemployment rate of the sector in 2015 and lower than the 5% in December 2016.
The aforementioned improvement was in part due to the less challenging inbound tourism environment (see Chart 3). Visitor arrivals jumped 3.7% YoY in the first quarter, with the increase coming mostly from Mainland China (+3.8% YoY). In addition to the improved inbound tourism statistics, retail sales picked up in March (3.1%) on a year-on-year basis for the first time since March 2015. Other tourism-related industries also saw some stabilizing. For instance, the accommodation sector achieved an average occupancy rate of 88% during the quarter (vs. 82.7% in 1Q2016), despite a slightly lower achieved hotel room rate (-2% YoY). The food service sector, at the same time, also held up with restaurant receipts growing by 4.1% during the quarter.
The economy was also supported by the improving external environment. On the back of a rebound in demand for Chinese exports, trading activities between Hong Kong and external economies improved remarkably in 2017 (see Chart 4). During the first quarter, Hong Kong’s total exports and imports grew 10.3% and 10.6% respectively. This should be conducive to the city’s trading and logistics sector, which represented some 22.2% of the city’s GDP in 2015.
Looking ahead The strong economic performance of 1Q2017 can be partly attributed to the lower comparable base in 1Q2016, when economic growth slowed to the lowest level since 2012. Revisiting the economic situation in late 2015 and early 2016, the overall Hong Kong economy was spooked by worries about abrupt deterioration in the Mainland Chinese economy as well as the fear of rising unemployment, which in turn led to weak investment and consumption sentiments. Since then, sentiments have improved notably, despite a still conservative view shared among businesses in tourism- and trade-related sectors. Given the achieved improvements in the earlier part of the year, we do see a potential for these businesses to become more optimistic going forward.
At the same time, inflation, referred to as the year-on-year changes in the composite CPI, is non-existent (see Chart 6), primarily due to contained food- and housing-related expenditure. As these two components, which combined for over 60% of the CPI basket, were up by only 1.5% and 0.3% respectively during the quarter, the composite CPI fell from a1.2% YoY increase in 4Q2016 to 0.5% YoY in 1Q2017.
In spite of the positive surprises brought by recent economic performance, we believe uncertainties remain and we should not become overly optimistic about the outlook.
First of all, we believe the growth in the first quarter may have been the peak for this year as a result of a lower comparable base. As economic conditions have steadily improved since 1Q2016, the favourable base effect may fade, and re-emergence of external uncertainties could eventually hinder growth (e.g. resurgence of trade tensions, rise of geopolitical tension, and potential financial market correction if the U.S. fails to deliver a well-anticipated tax reform).
Moreover, as a result of the strong real estate market performance, costs of ownership transfer1 soared 126.9% YoY in nominal terms during the quarter – similar levels were only seen in 2004 (post-SARS) and 2009/10 (post-global financial crisis). As this component represented some 10.9% of gross domestic fixed capital formation in the quarter, doubts on the sustainability of this trend at this precarious time are warranted. Particularly, given the escalated comparable base in 4Q2016, this may become a neutral/negative contributor to growth toward the latter half of the year, all other things being equal.
In view of the upbeat first quarter figures, the tight labour market conditions, the lower-than-expected inflation, and no anticipated major downward surprises in the latter half of this year, we are revising our 2017 GDP and inflation forecasts to 2-3% and 1.5-2% respectively.
1It is a component of investment activities representing stamp duties, legal fees and agents’ commissions, etc.
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