In light of the double whammy of the China-U.S. trade war and rising interest rates, Hong Kong businesses became more downbeat about their prospects in the near term, according to the results of the Chamber’s annual Business Prospects Survey, which was conducted during the final quarter of 2018.
Over the past two years, the Hong Kong economy has registered robust growth, with annual expansion of 3% or above in seven out of the eight quarters. Nonetheless, 76% of survey respondents expected economic growth to be below 3% in 2019 (Figure 1). While nearly half of the respondents in this group said the economy might expand by 2-2.99%, the rest anticipated growth of less than 2%.
When asked about their expectations on revenue in the next 12 months, respondents from the transport and logistics, manufacturing, and trading sectors, which are believed to be among those most directly hit by the trade war, were relatively more pessimistic. In particular, 35% of respondents from the transport and logistics sector said that they expected revenue would drop, compared to 20% overall (Figure 2).
Compared to the 2017 survey, businesses have become more cautious in both hiring and making additional capital investment for their Hong Kong operations. While 51% of respondents said they planned to hire more staff in the next 12 months, this proportion was smaller than the 2017 result (Figure 3). Meanwhile, only 33% of respondents planned to make additional capital investment, down from 48% in the 2017 survey (Figure 4).
The respondents highlighted uncertainty in economic conditions, rising operating costs, industry competition and talent availability as the major challenges facing their businesses (Figure 5). This result certainly reflects the importance and urgency of addressing the regulatory, labour and land bottlenecks in Hong Kong, as the Chamber has advocated.
To strengthen Hong Kong’s status as a premier international financial centre and a hub for trade and transport, we should not evaluate our own performance only. We should also compare Hong Kong with the achievements of other major global business and financial centres. According to our survey, Hong Kong continued to be perceived as lagging behind Singapore, Shenzhen and Shanghai in terms of competitiveness.
All in all, businesses were more satisfied in the areas where Hong Kong traditionally has an edge, such as flow of information, legal system, tax regime and infrastructure. However, they saw bigger room for improvement in cost of doing business, and innovation and technology.
2019 Economic Outlook
Given the externally-oriented and open nature of our economy, the global economic environment has knock-on effects on Hong Kong through trade and financial linkages. Therefore, before presenting our forecast for the Hong Kong economy for this year, it is important to understand the recent developments in, and our views on, the global economy.
Robust economic growth in the United States last year was empowered by fiscal stimulus driven mainly by tax cuts, but the boosting effect will fade this year. A divided Congress resulting from the midterm elections implies that further fiscal expansion will be difficult, if not unlikely.
Mainland China’s growth will be dragged down by the ongoing trade war. Even if an agreement is reached with the U.S., it will not necessarily lead to a removal of the additional tariffs previously imposed. In any event, a weaker RMB against the U.S. dollar, due to the divergence of monetary policies between the two countries, could partially offset the negative impacts of tariffs.
Meanwhile, Beijing’s policy shift from containing financial risks to stabilizing economic growth means that the chance of the Chinese economy suffering a hard landing in 2019 remains slim.
As to the Eurozone, economic growth will likely remain at a not-so-encouraging rate – although not particularly disappointing either. The aftermath of Brexit, uncertainty regarding the future of the E.U. as the Merkel era counts down, and fiscal woes in some European countries, will continue to dent investment sentiment.
Such market-disturbing events are unfolding amid noticeably tighter worldwide financial conditions, as major central banks retreat from the stimulus programmes they introduced after the global financial crisis.
The Federal Reserve is set to continue raising interest rates and shrinking its balance sheet this year, although the pace of tightening itself has become a subject of debate. The European Central Bank has halted its quantitative easing programme, and even the Bank of Japan has hinted it may adjust its policy setting. It is unlikely that they will reverse course simply because of market volatilities triggered by policy normalization.
Regarding the China-U.S. trade war, the Republicans’ losing control of the House does not imply any near-term policy reversal by the U.S. In contrast, as tariff policy is an area where the U.S. president has much leeway to make decisions without the need of legislative approval, President Donald Trump is unlikely to leave this weapon unused. A tougher stance towards Beijing is also an approach that politicians in Washington share in general. Any trade deal could be as fragile as the Paris climate agreement or the Trans-Pacific Partnership, from both of which the U.S. has pulled out.
For the first nine months of 2018, Hong Kong’s real GDP grew at 3.7%, compared to 3.8% in 2017. Domestic demand is underpinned by a tight labour market, while front-loading of shipments to avoid higher tariffs led to a better-than-expected trade performance in Q2 and Q3 of 2018. We estimate the headline real GDP growth to be 3.4% for the whole year of 2018.
In 2019, the unfavourable trade environment, slowdown of the Mainland economy, and tightening financial conditions will weigh further on the Hong Kong economy. As both the U.S. dollar and Hong Kong dollar are expected to stay relatively strong against other major currencies, our export sector could be put into a somewhat disadvantaged position. Meanwhile, the weakness of the RMB will diminish the purchasing power of Mainland tourists, who account for almost 80% of the city’s inbound tourists, which will put the retail sector under some pressure this year.
Overall, we expect the Hong Kong economy to grow at a range of 2-2.5% this year (Table 1). Hopefully, some of our concerns will turn out to be less disruptive than expected, leading to a higher growth rate. We will be more than happy if this is the case.