Hong Kong – Strong Q1 growth was likely the peak

Kelvin Lau
Senior Economist, Greater China
Standard Chartered Bank (HK) Limited
Growth expectations for Hong Kong started 2017 cautiously, but like most of the rest of the world, Q1 growth surprised positively. GDP expanded 4.3% y/y, beating the market consensus and accelerating from a revised 3.2% in Q4-2016. Last year’s low base (Q1-2016 growth was 1.0%, a three-year low) clearly boosted the headline number, but q/q growth of 0.7% also beat expectations following an already-strong 1.2% in Q4-2016.
The breakdown shows that private consumption expenditure (PCE) contributed 2.5ppt to headline growth, up from a solid 2.3ppt in Q4 (Figure 1). Household spending on services improved further, while spending on consumer goods (especially durables) were boosted by last year’s low base. Investment added another 1.3ppt to growth, similar to Q4’s 1.2ppt, supported by strong public and private building and construction activity. The continued improvement in services exports was also encouraging, partially offsetting the drag from net goods exports. Export growth picked up markedly in Q1, but imports rose even more due to improving domestic demand.
We expect the economy to continue to improve modestly, but Q1 growth likely marked the peak of the cycle. Quarterly headline growth is likely to ease back to the 2-3% y/y range as the year progresses and the favourable base effect fades. Other headwinds include plenty of geopolitical uncertainty, ongoing monetary tightening around the world, and an apparent slowdown in China’s growth after a strong Q1; all of these factors could start to weigh on sentiment again. Our Hong Kong SME Leading Business Index has been improving, but from a very low base. The strong Q1 GDP reading alone is enough to prompt us revise our full-year GDP forecast to 3.0% from 2.2%.