Hong kong 3Q GDP to decelerate

Hong kong 3Q15 GDP is projected to grow by 2.1% (YoY), down from 2.8% in 2Q (0.3% QoQ sa vs. 0.4% QoQ sa in 2Q). This is still relatively slow compared to a five-year trend growth of 3.8%. On the trade front, nominal merchandise exports and imports contracted 4.1% (YoY) and 6.7% respectively in 3Q, compared the 2.0% and 3.2% contraction seen in 2Q. The merchandise trade deficit has narrowed slightly (USD 11.6bn in 3Q vs. USD 16.1bn in 2Q). Services exports likely contracted as tourist retail spending continued to fall (-9.0% in 3Q vs. -7.8% in 2Q). Meanwhile, the growth of retained imports of capital goods quickened to 10.9% in 3Q from 7.0% in 2Q, foretelling a moderate pickup in private investment growth. 

Stellar equity and property market performances in 2Q have likely bolstered private consumption, which accounted for over 60% of GDP. However, the tide has turned in 3Q following the mainland's stock market rout and an imminent US rate hike. Private consumption growth is expected to be significantly lower at 1.6%, versus 6.0% in 2Q and 5.3% in 1Q. While sales of popular tourist items already contracted YoY for seven consecutive quarters, sales of other items - a proxy for locals' spending - have recorded positive growth consistently until 3Q15 (-3.3% YoY). 

As risks to both equity and property markets continue to overshadow consumer confidence, locals' spending would continue to slow in 4Q. On the trade front, export growth should hover at present levels (-1.5% YTD) as a mild recovery in the US is being offset by weakness in Chinese, Asian, European and Japanese markets. Public investment is likely to be relatively resilient as the government pushes ahead with key infrastructure projects. 

CPI inflation in 3Q15 (2.3% YoY) is much lower than in 1H (3.7%). Electricity, water and gas inflation will be particularly low in 2H15 due to a very high base in 2014 caused by the timing of government subsidies. In 2H14, CPI inflation for electricity, water and gas was lifted by the cessation of electricity subsidies (CPI for this component averaged more than 20% in 2H14 compared to 4.5% in 1H14). Housing inflation in the CPI was also a few percentage points lower in 2Q and 3Q due to the base effect of government rates waivers. The government has waived rates for the months April-September 2015, subject to a ceiling of $2,500 per tenement per quarter. This is higher than the $1,500 waiver applied to the same period in 2014. For these reasons, the full-year headline CPI projection of 3.2% (3.3% YTD, Sep) is much lower than last year's 4.4%.