Hong Kong’s economy to decelerate slightly in 2016-2017

In Q4 2015, Hong Kong’s economy expanded 2% y/y. The economy recorded an average growth of 2.4% in the whole of 2015. However, weaker Chinese and global demand will continue to negatively impact Hong Kong’s economic prospect, according to Scotiabank. Over half of Hong Kong’s exports are to mainland China. But the country’s services exports to the mainland are likely to remain strong.

As consumer income gains are being underpinned by a tight labor market, private consumption is expected to continue to be the main driver of Hong Kong’s economy, added Scotiabank. But the adverse effect of wealth coming from the ongoing property price correction is expected to impact growth in consumer spending, noted Scotiabank. Public sector expenditure, especially infrastructure projects on a large-scale, are likely to further underpin Hong Kong’s economy.

“We expect the territory’s output growth to decelerate slightly, averaging close to 2% y/y in 2016-17”, says Scotiabank.

Meanwhile, due to the fixed exchange rate, US monetary policy is a major factor for decision for local interest rates. The monetary authority of Hong Kong hiked the base rate to 0.75%, up 25bp, one date after the US Fed hiked its interest rate in December 2015.

“We expect Hong Kong’s benchmark rate to be raised by 50 bps this year in line with developments in the US”, anticipates Scotiabank.

Hong Kong’s policymakers, meanwhile, will continue focusing on managing the threats of possible outflow of capital and a disorderly property market correction. Recently, the country’s headline inflation accelerated. In February, consumer prices rose 3.1% y/y due to higher food prices. However, the acceleration is expected to be for a brief period of time.

“Given a stable USDHKD exchange rate and persistently low oil prices, we expect inflation to moderate over the coming months and close the year at around 2.3% y/y”, according to Scotiabank.

Meanwhile, Hong Kong has been able to gather a large amount of fiscal reserves because of budgetary surpluses since 2004. A decline in property market is likely to restrict the administration’s revenues in the near future in spite of strong government finances. This, along with higher public expenditure to underpin  the economy, will lead to smaller fiscal surpluses, averaging around 1% of GDP in 2016-2017, down from about 3.75% in the past two years, noted Scotiabank.

Fiscal policy is the main tool to combat any external shocks in the absence of independent monetary policy. Low oil import bill has more than countered the effect of the nation’s weak export performance, leading to narrowing of trade deficit.

“The current account surplus will likely average 3% of GDP in 2016-17”, added Scotiabank.