Overview Recent data suggests that economic dynamics remain soft in the third quarter following a weaker-than-expected second-quart...

Hong Kong Economic Outlook

Recent data suggests that economic dynamics remain soft in the third quarter following a weaker-than-expected second-quarter expansion. Growth in retail sales, a proxy for private consumption, fell to a six-month low in July on the back of rising external uncertainties and reduced tourist arrivals. Hong Kong’s Purchasing Managers’ Index remained in negative territory in August for the fifth month in a row as escalating trade tensions between China and the United States weigh on economic sentiment. Despite staying at historically low levels, the unemployment rate climbed to an eight-month high in August. Moreover, the island’s high-flying property market is losing steam and could experience a sharp correction in 2019 due to receding capital flows from China and tighter financial conditions.

Although economic growth will remain strong this year due to a robust domestic economy, risks are clearly skewed to the downside. A sharp economic downturn in China, spillovers from the trade war between China and the United States, a strengthening of the HKD against regional peers and higher interest rates all threaten to derail Hong Kong’s solid growth trajectory. FocusEconomics panelists expect growth of 3.6% in 2018 and 2.7% in 2019, which is down 0.1 percentage points from last month’s forecast. Inflation stabilized at June’s 2.4% in July. Rising energy prices and higher residential rents are expected to fan inflationary pressures in the coming months. Moreover, a tight labor market continues to push up domestic inflation. FocusEconomics panelists expect inflation to average 2.3% in both 2018 and 2019. The Hong Kong Monetary Authority (HKMA) manages the Hong Kong dollar within a tight tolerance band to the U.S. dollar, between 7.75 and 7.85 HKD per USD. In an attempt to support a weakening HKD, on 23 August the HKMA intervened in the foreign currency market once again, this time buying HKD 1.8 billion and selling USD 255 million. Panelists expect the island to maintain its current currency peg with the USD at least until the end of our forecast horizon in 2022.

Business Outlook
The Nikkei Hong Kong Purchasing Managers’ Index (PMI), which is released by IHS Markit, inched up from 48.2 in July to 48.5 in August. Despite the increase, the index remains below the 50-point threshold that separates expansion from contraction in the private sector. August’s reading reflected soft client demand, which pushed down new orders and output. Poor demand conditions also weighed on employment and purchasing activities. Export sales to China fell markedly in August on the back of ongoing trade disputes with China. Against this backdrop and in order to boost sales, businesses reduced selling prices despite the increase in input costs as a result of a weaker HKD and higher commodity prices.

Retail Sector
REAL SECTOR | Retail sales growth falls to a six-month low in July Retail sales volumes expanded 5.9% in annual terms in July, decelerating from June’s 9.8% increase and marking the weakest reading since February. The slowdown mainly reflected declining sales for food, alcoholic drinks and tobacco as well as for supermarket sales. Despite remaining robust, sales of luxury items decelerated notably in July. On the flip side, sales of fuels accelerated in July largely due to higher oil prices, while sales of consumer durable goods also gained steam. On a seasonally-adjusted, three-month-moving-average basis, retail sales in the May–July period decreased 1.4% from the preceding three-month period ending in April. The print followed the 0.1% decrease in the three-month period ending in June and represented the largest decline since December 2016. Meanwhile, annual average variation in retail sales volumes inched up to an over four-year high of 8.3% in July from 8.2% in June.

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