Led by the strong recovery of domestic demand and inbound tourism, Hong Kong’s economy improved visibly in the first quarter of 2023, as real gross domestic product (GDP) resumed growth at 2.7% from a year earlier. The number compared with a 4.1% decrease in the fourth quarter of 2022. This has largely exceeded expectations as the consumption-led recovery gained traction with at the start of 2023, according to an economic report by HSBC Global Research.
It has also helped offset ongoing weakness in goods trade and investment from the high interest rate environment. Sequentially, GDP rose by 5.3%, the fastest pace since Q1 2021. There is more room for the recovery to gain steam as tailwinds from consumption vouchers and increased visitors will help to keep the recovery momentum strong this year.
Pent-up demand in the post-pandemic world was the main driver for the rebound, serving to boost local consumption recovery. The report revealed that retail sales related to local demand (excluding housing and volatile items) rose by 35% year on year in January and February, with increased purchases of discretionary items like clothing and cosmetics pointing to higher confidence by households. However, rotation towards more services demand and away from goods demand is expected as the consumption recovery continues. Another round of digital consumption vouchers, with the first batch already disbursed in April and another batch coming in July, will further shore up consumer spending. Additionally, a stronger recovery in the labour market will also help to support consumption strength in the coming quarters. The unemployment rate dipped close to pre-pandemic levels, falling to 3.1% in March.
The tourism recovery has also helped to boost growth. Data from the report reveals that exports of services rebounded to 16.9% year on year in the first quarter, partly offset by outbound Hong Kong residents on vacation. In early 2023, the resumption of cross-boundary travel between Hong Kong and the Mainland and removal of restrictions, such as PCR requirements, have resulted in a spike in tourism-related spending in both goods and services. Mainland visitors make up 80% of total visitors to Hong Kong historically. The level of Mainland visitors as compared to pre-pandemic levels has jumped, from under 10% in January to over 40% by the end of March. Also, the Labour Day weekend and Golden Week, combined with resumed transportation links (long-haul high speed rail restarted on 1 April), led Mainland tourist visits rising to 50% of their pre-pandemic levels in April. The number of visitors from the Mainland is expected to reach about two-thirds of pre-pandemic levels this year.
According to the report, investment reversed an over year long decline, rising by 5.8% year-on-year, partly due to a low base. The property market experienced some relief too, as a result of increased economic activity and cross-boundary population flows. There was also a small increase in residential property prices in recent months. Meanwhile, pressure from the ongoing US Fed hiking cycle is expected. The ongoing recovery momentum and increased Mainland visitor numbers will serve to support investment growth this year, the report predicted.
The report also said that a stronger initial rebound presents more upside risk to growth and points to a more front-loaded recovery. However, while there are still headwinds such as from weak goods flows (both exports and imports of goods remained in double-digit contraction), the recovery momentum from local demand and increase in visitors is expected to continue gaining traction on the back of further support from consumption vouchers and resumed transportation linkages in 2023. Another encouraging sign is the improvement in sentiment, as highlighted by soft data such as the PMIs, which will help broaden recovery in the coming quarters.
Financial Secretary Paul Chan, whose 2023-24 budget was approved on 3 May by the Legislative Council, said he was optimistic about the city’s overall economic performance this year. He predicted greater growth notwithstanding international tensions and rising interest rates in the US, and warned that Hong Kong must focus on good risk management in the face of a poor global economic outlook. He added that the financial blueprint would allow the implementation of several "measures proposed in the budget to boost the economy and relieve people's livelihood." The Government would continue to work to “consolidate the strength“ of economic recovery through boosting domestic consumption, such as the “Happy Hong Kong“ campaign.