Economics

DBS Focus
Hong Kong: Growth downgraded
Economics/Strategy/Rates/FX

Group Research Aug 02, 2019

Samuel Tse The Hong Kong economy has been hit by
30Economist
external headwinds

Chart 2: Merchandise trade statistics

% (YOY, 3mma) HKD bn
20 200
Trade balance (RHS)
15 150
Exports

10 Imports 100

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0 0
• We have downgraded Hong Kong’s
-5 -50
real GDP growth forecasts to 0% from
2.5% for 2019, and to 0.5% from 2% -10 -100
for 2020. 2014 2015 2016 2017 2018 2019

Source: CEIC, DBS Group Research

• Early estimate of real GDP was 0.6%
YOY in 2Q19, undermined by sluggish We have downgraded Hong Kong’s GDP
external trade. growth forecasts to 0% from 2.5% for 2019,
and to 0.5% from 2% in 2020. While growth was
• Gross domestic fixed capital benign at 0.6% YoY in 2Q19 (Chart 1), it
formation decelerated to -12.1% in
contracted 0.3% QoQ. Another quarter of
2Q19 from 7.0% in 1Q19, its slowest
negative sequential growth in 3Q19 would tip
pace in the past decade.
Hong Kong into a technical recession.
Second quarter growth was hurt by lingering
Chart 1: GDP and inflation trade tensions between China and the US, Hong
% (YOY) Kong’s top two export destinations.
5.5
Merchandise exports growth have contracted
5.0
4.5 eight straight months since November 2018;
4.0 the -9% YoY print (Chart 2) in June was the
3.5 biggest drop since February 2016. By country,
3.0
outward shipment to the US and China fell 6.6%
2.5
2.0 and 5.3% respectively. Exports to advanced
1.5 economies were also sluggish; EU and Japan fell
1.0 by 7.4% and 6.5% correspondingly. Likewise,
0.5
2015 2016 2017 2018
outward cargoes to emerging market such as
Real GDP GDP Trend growth CPI ASEAN were also flat from a year ago.
Source: CEIC, DBS Group Research

Refer to important disclosures at the end of this report.

Hong Kong: Growth downgraded Aug 02, 2019

Chart 3: Loans by end-use Chart 5: Retail Sales and Hang Seng Index
% (YoY) % (YOY) Index
Local use Trade finance 40 34,000
45 Retail sales value
Foreign use 30
35 Hang Seng Index (RHS) 31,000
20
25
10 28,000
15
0 25,000
5

-5 -10
22,000
-15 -20

-25 -30 19,000

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Source: CEIC, DBS Group Research Source: CEIC, DBS Group Research

By product, re-exports were notably weak. The (to 0.2% in 2Q19 from 0.8% in 1Q19 and 3.3% in
hard-hit sectors here were machinery and 4Q18), especially the transport, financial and
transport equipment (which contracted 11.3% other business services sectors. Exports of
in June from -3.1% in May) and manufactured travel services and visitor spending were also
goods (to -10.5% from +1.8%). The 10th hurt by a weaker Chinese yuan (Chart 4).
contraction (-8.4%) in trade finance in June
There were negative spill-overs from the
(Chart 3) has kept the outlook cloudy. More
challenging external environment into the
pain will be in store for re-exports if the US
domestic economy. The negative wealth effect
imposes 25% tariffs on the rest of the goods it
from the volatility in the stock market has
imports from China (USD325bn).
dampened the growth in private consumption
The Hong Kong stock market was volatile in the (60% of GDP) to a modest 1.2%. Retail sales
quarter. Cross-border financial activities value reported the 5th consecutive YoY declines
decelerated, and export of services moderated in June (Chart 5). Non-necessities such as
Chart 4: Tourist arrivals, retail sales value jewellery (-17.1%), optical (-11.8%), and
and rent electrical & other consumer durable goods (-
% (YOY) Retail shops rental (RHS) % (YOY)
40 8.0
16.2%) continued to fall.
Visitor arrivals
30 Retail sales value 6.0 If prolonged, political uncertainties will further
20 4.0
dampen domestic consumption. Retail sales is
expected to fall by 5% for 2019. Shops have not
10 2.0
been able to operate over the weekend. Visitor
0 0.0
arrivals may moderate ahead. If these trends
-10 -2.0 persist, they will eventually feed through the
-20 -4.0 tight labour market and lift the unemployment
-30 -6.0 rate from its 20-year low of 2.8%. Both labour
2014 2015 2016 2017 2018 2019 demand and supply have started to moderate
Source: CEIC, DBS Group Research since January 2019. Employment and labour
force growth have fluctuated between ±0.3%
and flattened the labour participation rate of
60.7% in February-June.

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Hong Kong: Growth downgraded Aug 02, 2019

Chart 6: Investment and property price capital outflows. 1M HIBOR returned to 1.8%-
Index % (YOY) 2.0% levels from 2.99% after the large-scale IPO
200 10
190 8 exercise and quarter-end effect in mid-June –
6 early July. Both USD/HKD spot and its 12M
180 4
170 2 forward outright were still well within the 7.75-
0 7.85 convertibility band (Chart 7).
160
-2
150 -4 Hong Kong is well-positioned to safeguard its
140 -6
-8 HKD peg. The Exchange Fund is substantial at
130 -10 USD530bn or more-than-double the monetary
120 -12
2016 2017 2018 2019
base. While growth in customer deposits for the
Centaline Property Centa-City Leading Index USD (1H19: 8.5%) has outpaced those for the
GDP: Fixed Capital Formation (RHS)
HKD (1.9%) and the CNY (6.3%) (Chart 8), this
was attributed to renewed trade tensions and
Source: Bloomberg, DBS Group Research the USD’s resilience from a relatively stronger
Gross domestic fixed capital formation US economy vs the rest of the world.
decelerated to a decade low of -12.1% in 2Q19
Chart 8: Deposits growth
from 7.0% in 1Q19. Although the Centaline YOY (%) YOY (%)
Property Centa-City Leading Index hit a new 30 50
40
record high in June, investment sentiment
20 30
stayed weak (Chart 6). On the economic
20
outlook, pessimistic business expectation
10
mirrored the weakness in PMIs (which posted 10
0
15 consecutive contractions), not helped by the -10
ongoing domestic instability since late June. 0 -20
-30
Chart 7: USDHKD 12 Month Forward Points -10 -40
8.5 2014 2015 2016 2017 2018 2019
Deposits: Total HKD
8.4
US Dollar Renminbi (RHS)
8.3 Source: Bloomberg, DBS Group Research
8.2
8.1
8 Property prices appeared to have bottomed in
7.9 7.81 February but its recovery has been tepid.
7.8 According to the Rating and Valuation
7.7
Department, residential property prices
7.6
witnessed the first month-on-month decline of
7.5
1997 2000 2003 2006 2009 2012 2015 2018 -0.8% in June 2019. The Centa-City Leading
Source: Bloomberg, DBS Group Research Index also edged down in July from its record
high on June 28. The fall in property prices has
On the monetary front, money supply growth
not triggered property market sell-off thus far.
has remained resilient. M2 (HKD) continued to
The healthy job market has kept the
rise by 3.5% in June from 2.8% in May. HKD
delinquency ratio of mortgage loans
deposit growth also rose by 3.6%. Interestingly,
outstanding for more than 6 months (0.01%)
political uncertainties did not lead to massive
Page 3
Hong Kong: Growth downgraded Aug 02, 2019

low. The risky loans - private co-financing Inflation has returned

scheme, only accounted for 1.9% of total
mortgage value. The outstanding number of
mortgages in negative equity also fell from 262
cases in end-2018 to 1 case in June. The loan-
to-value ratio stayed low at 47.4%. The US rate
cut in July and the dovish global rate
environment should support housing prices.
CPI rose by 3.3% YoY in June from 2.8% in May,
largely due to food prices (5.6%) from increased
pork and fruit prices in China. Apart from
elevated import prices, an upward adjustment
in public housing rentals will also fuel the
inflation. Against a weaker growth outlook,
stagflation risks may emerge in 2H19.

The deterioration in the demand-supply

balance remains as a key issue over the
medium-long term. The vacancy tax is still in
legislative procedure. Potential private
property supply for the next 3 years stayed at
93,000 flats for the 5th quarter. With policy
shifting the public-private housing ratio from
6:4 to 7:3, flat supply has been reduced from
25,500 in FY17/18 to 13,850 in FY18/19. The
target for FY19/20 fell by 25% from 18,000 to
13,500. The 20-year Lantau Tomorrow plan can
satisfy housing demand for 1.1mn people. Even
so, the newly-built artificial islands can only
meet the demand of the immigrants with more
land required to fulfil local demand.

Page 4
Hong Kong: Growth downgraded Aug 02, 2019

Group Research
Economics & Strategy

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
+65 6878-9548 taimurbaig@dbs.com

Nathan Chow
Radhika Rao
Strategist - China & Hong Kong
Economist - Eurozone & India
+852 3668-5693 nathanchow@dbs.com
+65 6878-5282 radhikarao@dbs.com

Masyita Crystallin, Ph.D.

Irvin Seah
Economist – Indonesia & Philippines
Economist - Singapore, Malaysia, & Vietnam
+62 21 2988-4003 masyita@dbs.com
+65 6878-6727 irvinseah@dbs.com

Joanne Goh Duncan Tan

Regional equity strategist FX and Rates Strategist - ASEAN
+65 6878-5233 joannegohsc@dbs.com +65 6878-2140 duncantan@dbs.com

Eugene Leow Samuel Tse

Rates Strategist - G3 & Asia Economist - China & Hong Kong
+65 6878-2842 eugeneleow@dbs.com +852 3668 5695 samueltse@dbs.com

Chris Leung Philip Wee

Economist - China & Hong Kong FX Strategist - G3 & Asia
+852 3668-5694 chrisleung@dbs.com +65 6878-4033 philipwee@dbs.com

Ma Tieying
Economist - Japan, South Korea, & Taiwan
+65 6878-2408 matieying@dbs.com

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

Sources: Data for all charts and tables are from CEIC, Bloomberg
and DBS Group Research (forecasts and transformations).
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DBS Indonesia (collectively, the “DBS Group”). It is based on