Strong headwinds ahead for Hong Kong economy

Hong Kong's economy experienced strong headwinds in the past two quarters. Leading indicators such as PMI worsened to 44.4, its lowest reading since early 2009. Considering Chinese tourist arrivals accounts for more than 70% of total tourist arrivals, a strong HKD is expected relative to CNY to push mainland tourists further away from Hong Kong to other countries in the region or Europe, weighing on Hong Kong's tourism sector and the growth outlook, notes Barclays. 

Moreover, retail sales growth has remained in negative territory since last December. The slowdown of mainland China's growth and expected Fed rate hike in the near term are believed to be the two major headwinds.

"As a result, we revised down our 2015 GDP forecast to 1.8% from 2.3% due to the continued decline in retail sales and a weaker-than-expected growth outlook for Hong Kong's major trading partners, in particular China", says Barclays in a research note. 

Hong Kong's private sector will contract in the near term as new business from mainland China placed at Hong Kong's private sector firms dropped at the sharpest rate since late 2008. To support growth, there is room for more accommodative fiscal policy to promote investment including infrastructure.