As a world trade and financial centre and a key base of services for China, Hong Kong’s small economy has one of the highest degrees of financial and trade openness in the world and more than 98% of its exports are re-exports of goods imported from neighbouring countries. Its performance is thus volatile by nature and extremely dependent on world demand for goods and services and global capital flows, as proven in the recent past.
Economic growth settled in the 3% range
Economic growth decelerated markedly in 2012 (+1.5% vs. 4.9% in 2011) as a result of weaker domestic demand and the slowdown in both world trade and Chinese growth. In 2013, real GDP growth rebounded to a modest 2.9% (see graph 1). The stabilization in world trade growth and in Chinese growth provided some relief to Hong Kong’s trade and services sector. It helped improve the contribution of net exports to GDP growth, which yet remained very slightly negative. Domestic investment growth decelerated last year (+3.1% in real terms, vs. 6.9% in 2012), constrained by still uncertain external demand prospects and by the introduction in Feb13 of a new set of macro-prudential measures in the property sector. Private consumption, which accounts for a significant 66% of nominal GDP, remained relatively dynamic. It grew by 4.1% in 2013 (almost unchanged from 2012), supported by wealth effects associated with high asset prices, solid labour market conditions, robust spending by Mainland Chinese visiting Hong Kong and one-off fiscal relief measures.
Real GDP growth is presently projected at no more than 3% in 2014 and 2015. On the one hand, the expected strengthening in the global economy should support Hong Kong’s economic activity, but downside risks regarding world demand still remain elevated. On the other hand, there could be significant headwinds to growth in 2014-2015 stemming from the property market, credit conditions and Mainland China. As a matter of fact, property prices are likely to experience a downward correction in the coming months, as domestic monetary conditions start to be slightly less accommodative (cf. infra). This could constrain further domestic investment and hamper private consumption given weaker wealth effects. Moreover, Chinese growth is projected to continue to slow down (to 7.3% in 2014 and 7.1% in 2015), in turn weighing on Hong Kong’s activity.
BY Christine PELTIER