As we approach 2025, it is time to reflect on the performance of the Hong Kong economy over the past year, with recovery having proven to be more challenging than expected.
Private consumption expenditure, which constitutes two-thirds of Hong Kong’s GDP, has experienced a loss of momentum and transitioned into a decline following six consecutive quarters of growth. Traditional sectors like tourism, logistics, construction and others have persistently adapted to the new development paradigm.
Higher-for-Longer Interest Rates
Many have long awaited the interest rate cuts, which were finally announced in September this year. The United States initiated an interest rate hike cycle in March 2022 to cope with inflation. During this period, the Fed raised interest rates 11 times until the last rate hike in July 2023.
Increasing bank borrowing costs in a high-interest-rate environment are driving more cautious consumption and investment decisions. The cumulative 75 basis points reduction in interest rates this year has brought Hong Kong’s key rate back to its level from February 2023, providing much-needed support for the city’s economy and the housing market.
Consumption Patterns Impact Retailers
The retail sector is grappling with unprecedented challenges due to the rising outflow of local consumer spending. For the first 10 months of this year, Hong Kong residents' number of outbound trips reached 85 million, representing a more than 50% increase than in the same period during 2023.
The strong Hong Kong dollar amid high interest rates and a strong US dollar has made overseas spending more affordable for Hong Kong residents. More Hong Kong residents are heading to Shenzhen to indulge in dining, shopping and entertainment. Japan, one of the most sought-after destinations among Hong Kong travellers, drew nearly 2 million Hongkongers in the first nine months of the year, marking a 30% increase from the previous year, in light of the Japanese yen hitting a 34-year low.
Conversely, the city welcomed 32 million visitors in the first nine months of 2024, of which nearly 80% were from the Mainland. This marked a 40% year-on-year increase, though it still stood at just 70% of pre-pandemic levels.
Mainland tourists were once considered big spenders on luxury goods. However, according to the latest Bain & Company Luxury Study, the global personal luxury goods market is expected to decline by 2% to €363 billion in 2024, making it one of the weakest years on record, while sales in China are estimated to decrease by 20% to 22%.
This trend aligns with the reduced spending of Mainland visitors in Hong Kong. Before the pandemic in 2018, per-capita spending by Mainland visitors was $7,000 for overnight visitors and $2,400 for same-day visitors, compared to $5,100 and $1,300 in the first half of 2024, respectively.
Housing Prices Remain Unaffordable
The prolonged interest rate hikes have indeed put significant pressure on the housing market. In February, the government took a decisive step by scrapping various tightening measures for residential properties, including the Special Stamp Duty, the Buyer’s Stamp Duty and the New Residential Stamp Duty, all of which had been in effect for more than 10 years.
The Rating and Valuation Department reported a fifth consecutive month of decline in the private residential price index. In September 2024, the index dropped to 287.9 points, marking a 27.7% decrease from the historical peak of 398.1 recorded three years ago. Prices have fallen by approximately 7% during this period, reaching their lowest point since August 2016.
However, Hong Kong remains the most challenging city for homebuyers. According to the UBS Global Real Estate Bubble Index 2024, Hong Kong's house prices are back at the level they were last seen in 2012. Despite this, a skilled service worker in Hong Kong must work an average of 22 years to buy a 60 sq m (650 sq ft) apartment, which starkly contrasts with just 10 years in Singapore.
In the next issue of the Bulletin, we will delve into the business sentiment regarding the Hong Kong economy in 2025 and the implications of the new U.S. administration amid ongoing geopolitical tensions.
Doris Fung, dfung@chamber.org.hk