As reported by focus Intesa Sanpaolo, Hong Kong closed 2014 with a GDP growth of 2,3%, down on the 2,9% of the previous year, with private consumption providing the largest contribution to growth (1,8%), despite the deceleration (2,7% from 4,6% in 2013). Inventories added 0,8%, while fixed investment fell 0,3%. The dynamics of net exports worsened for the fourth consecutive year due to the weakness of foreign demand and the appreciation of the exchange rate. On the supply side, where the service sector makes up 93% of the GDP, the slowdown in wholesale and retail trade and commercial services, as well as in the financial and insurance sector, had a particular impact.
Foreign trade data for the first quarter show a slight improvement in exports and a marginal slowdown in imports compared to the fourth quarter, although both recorded a negative trend change in March. Retail sales are still weak (-2,6% in February) and growth prospects are contained by the divergent profiles of various consumer confidence surveys, some shadows on the labor market and expectations of a reduction in tourist flows. The unemployment rate, while remaining at historic lows, rose to 3,3% in the last quarter of 2014. In the meantime, there was also a slowdown in real wages and disposable income.
In this context, the significant weakening of the euro and the yen against the Hong Kong dollar, due to the fixed exchange rate with the US dollar, is also beginning to be reflected in lower flows of tourists from Japan and the Eurozone, generally interested in luxury goods, with a further dampening effect on retail sales. Consumer price inflation marginally up to 4,4% in 2014 from the 4,3% recorded the previous year. This slowdown is due in particular to the housing sector (see the item rentals) and services.
The moderating trend in import prices is expected to continue throughout the year give her expectations of low oil prices, the general containment of food and raw material prices, the appreciation of the local dollar in line with the US one and the slowdown in prices in the motherland. All that, together with the deceleration of the economy, it points to a decrease in annual average inflation, expected at 3,2% in 2015 from 4,4% in 2014. The real estate market continues to be supported by low interest rates and by a demand higher than supply in the residential sector, so much so that in 2014 real estate transaction volume climbed 25,9%, to over 63 thousand units. The risk of a sharp slowdown derives essentially from a sudden and substantial increase in interest rates with the start of the Fed hikes, which is not the central scenario but on which uncertainty continues to increase.
According to published estimates, the government budget for the 2014-15 fiscal year is projected to be in surplus of HKD 63,8 billion, or 2,8% of GDP, thanks to higher-than-expected revenues from corporate profit taxes, stamp duties, payroll taxes, and real estate taxes. The Government also expects a smaller surplus of 2015 billion for the 2016-36,8 fiscal year, with an increase in operating expenses of 11,5% and recurring expenses of 6,5%. The latter (equal to 324,6 billion) are mostly destined for education (22%), medical and health services (16,8%) and social services (18,4%).
The budget also contains measures to diversify the manufacturing base and increase competitiveness, as well as a moderate increase in capital expenditure, which are essentially transport infrastructure projects to improve connections with the continent, without forgetting public housing. In a long-term scenario driven by population aging which could lead to a structural budget deficit over the next 10 years, the Government sees itself committed to the containment of public accounts in view of the increase in health and social spending. Monetary and credit conditions continue to be accommodative, supported by ample liquidity in the banking system and low interest rates, with a monetary policy tied to that of the Fed at fixed parity with the US dollar.
The current account surplus in the post-crisis years continued to shrink to a low of 1,5% of GDP in 2013, to go back to 1,9% in 2014. The trade balance has been negative since 2011 and reached 10,4% of GDP in 2014, due to a weaker trend in exports. At the same time, the services balance moved into positive territory (+10,5% of GDP) thanks to the increase in tourism and the significant development of financial services linked to the renminbi off-shore market. Capital flows between Hong Kong and China have increased significantly in recent years thanks to the growing integration of the two economies and China's plans to gradually liberalize the capital account, in particular the Renminbi Qualified Foreign Institutional Investors (RQFII) Program and the most recent one Shanghai Hong Kong Stock Connect launched in November 2014.
The effective exchange rate appreciated by 6,3% in nominal terms and by 10,3% in real terms during 2014. Net capital inflows from foreign direct investment and portfolio investment are generally negative, as strong inflows also correspond to large outflows of foreign investment by residents. The balance of payments balance is positive and has so far allowed for a steady accumulation of foreign currency reserves which, equal to about 328 billion dollars covers 6,3 months of imports and 4,6 times the short-term debt. Uncertainty about when and how large the Fed hikes will start can lead to higher volatility in capital flows and increases the risk of outflows. This is partly mitigated by the concurrent monetary policy of quantitative easing in both Europe and Japan. Overall, analysts expect greater exchange rate volatility within the fluctuation band during the year.
Growth forecasts for 2015 have been revised downwards to +2,6%, motivated by slowdown in China and from monthly data pointing to a worse-than-expected first quarter. The risks remain to the downside and come not only from the worst expectations on tourist flows and therefore on consumption, but also from a weaker than expected performance of foreign demand. Added to this is the risk of a possible slowdown in the real estate market in the event of a sharp increase in interest rates with the start of the Fed hikes. The rating is stable at AA+ for Fitch and Moody's (Aa1, equivalent to that of Fitch) while it is two notches higher than that of Standard and Poor's (AAA).
The CDS spread on 5-year US dollar sovereign debt has remained in the 45-50bps range over the past three months. The divergent growth and monetary policy scenarios of the major advanced economies, in particular the growing uncertainty about the start and extent of the Fed's hikes, constitute the only risk factor on the trend of capital inflows. Tuttavia, the peg to the dollar (Linked Exchange Rate system, LERs) it has so far proved extremely resilient to external shocksmost recently that of the 2008 crisis, and will continue to act as an anchor for the country's financial and monetary stability.
