Hong Kong’s economy moving on a thorny road towards the year end

Hong Kong’s GDP growth decelerated to 2.9% in Q 3 from 3.5% in Q2 2018, the slowest pace in two years. Most of the decline was due to weaker private consumption and government spending. The only bright spot seems to be investment but prospects are not good for investment either. In fact, the improvement is concentrated on machinery and equipment which tends to be very volatile. Also, Hong Kong’s PMI has been well below 50 since April, casting additional doubts on the business confidence. Inbound tourism has recorded favorable growth but could not compensate for the losses in net trade in goods. In fact, net ex port is contributing negatively to Hong Kong growth. Hong Kong labor market has remained stable so far. The unemployment rate stayed at a low level and total employment increased solidly with sustained wage growth. Inflation went up slightly in Q3 on the back of rising local costs and upward adjustment in rental costs. In spite of the deceleration in the real economy, the interbank liquidity has slightly softened since September notwithstanding the Fed’s interest rate hike. The HKD has appreciated against the USD. The Hang Seng Index pe r formed poorly in Q3 due to suppressed risk appetite and worsened market sentiment , and only started to rebound recently. In the asset market, the residential property has signaled the start of a cool-off based on shrinking transaction volume and sliding flat prices beginning in August. That said, the increase in flat rents have significantly accelerated . All in all, the deterioration of Hong Kong’s economy confirmed our earlier forecast. We continue to expect headwinds in the near term due to the increasing global uncertainties and weaker growth support from China. As such, we remain our forecast for Hong Kong GDP to be 3.4% for 2018.