GDP Growth
GDP growth lost some momentum in Q2, after hitting an over 10-year high in Q1. The slowdown was predominately driven by a weaker external sector as export growth tapered and import growth strengthened. However, domestic demand rebounded notably in the quarter—hitting an over 11- year high—as both private consumption and fixed investment surged. Turning to Q3, year-on-year growth is likely losing further momentum due to a slightly less favorable base effect, but the economy should be strengthening on a sequential basis. In August, the government began disbursing electronic vouchers of HKD 5000 to permanent residents, which should be stoking private spending. Moreover, the private sector PMI continued to point to an expansion in activity for July, boding well for GDP. Nevertheless, the government’s “zero Covid-19” strategy continues to hamper the tourism sector amid prolonged travel restrictions. GDP should expand robustly this year, after a two-year-long recession exacerbated by political unrest and Covid-19. A recovering global economy should power external demand, while domestic activity should gradually strengthen, supported by government stimulus. That said, uncertainty over the spread of the Delta variant poses a downside risk to the outlook.
Real Sector
The IHS Markit Purchasing Managers’ Index (PMI) fell to 51.3 in July from June’s 51.4. As a result, the index remained above the 50-threshold, but pointed to a moderating improvement in the private sector from the previous month. The slight moderation was predominately due to falling employment levels due to rising wage costs. Nevertheless, output and new orders were relatively unchanged accelerating slightly over the previous month. Commenting on the latest reading, Jingyi Pan, economics associate director at IHS Markit, noted: “Demand and output growth accelerated, which had been positive signs, although foreign demand appeared to have softened once again as Covid-19 disruptions remained a prevalent issue abroad. Price pressures also persisted for Hong Kong SAR private sector firms.”
Retail sales grew 2.8% year-on-year in June (May: +7.8% yoy). The outturn marked the worst reading since January. The reading reflected a broad- based downturn across the major sectors, with fuel, supermarkets and food and alcoholic beverages all contracting in June. Lastly, jewelry, watches and valuables sales moderated, while clothing and footwear sales increased. Meanwhile, the trend improved notably, with the annual average variation of retail sales coming in at minus 1.7% in June, up from May’s minus 4.0%.
