Economic headwinds hound Hong Kong despite 3Q16 growth

Low growth environment likely to persist.

Hong Kong's headline real GDP growth came in at 1.9% y-o-y in Q316, picking up from the 1.7% y-o-y expansion registered in Q216, which brought economic growth for the first nine months of 2016 to 1.4%.

According to a research note from Fitch Ratings, despite the territory's economic acceleration in Q316, it maintains its downbeat expectations for the Special Administrative Region (SAR)'s growth prospects. It believes that Hong Kong's low growth environment is likely to persist, which is reflected in Fitch Ratings' 2016 and 2017 real GDP growth forecasts of 1.2% (slightly below the government's revised full year forecast of 1.5%) and 1.7%, respectively (versus 2015's 2.4%).

Looking at the Q316 GDP report breakdown in expenditure terms, gross domestic fixed capital formation came in at 6.0% y-o-y in Q316, which was the first positive print since Q215.

Here's more from Fitch Ratings:

In our view, the stabilisation in the territory's residential real estate prices has helped to support investment spending in Q316, but this is unlikely to be sustained over the coming quarters.

We believe that there is plenty of downside left for Hong Kong's residential property market over the coming quarters, which will weigh on construction activity. In particular, the territory's housing market remains extremely overvalued. According to Demographia's 12th International Housing Affordability Survey, median house prices in the territory hit 19.0 years of median household income in 2015, which was significantly above Australia's 5.6x (the next most expensive market).

We have previously written that there is an increasingly likelihood that Hong Kong policymakers will look to tighten regulations amid financial stability concerns due to elevated real estate prices (see 'Long-Term Property Correction Not Yet Over', August 23).

Indeed, the territory's government announced on November 4 that the stamp duty for non first-time homebuyers will be raised to 15.0% for individuals and corporate buyers, which will be up from 1.5% to 8.5%, depending on the transaction price. The measure is likely to have a negative impact on property transactions, and also has the potential to cool house prices over the coming months. The SAR's property developers are therefore likely to take a cautious approach towards undertaking new projects.

According to Hong Kong's Census and Statistics Department (Censtatd), the external sector continued to improve in Q316, with overall export growth accelerating to 1.1% y-o-y in Q316, from 0.6% y-o-y, marking the second consecutive quarter in positive territory. However, we maintain our view that this ongoing rebound is likely to be temporary. Notably, mainland China's trade outlook will remain sluggish, and this will correspondingly weigh on Hong Kong's external sector as the territory is a key port for Chinese exports and imports.

The weak global environment will continue to be the major factor dragging on the mainland's export growth over the coming quarters. In particular, the US, which is the territory's second largest export destination, is facing a weak growth outlook as business investment and factory output remain poor. In addition, Donald Trump's victory during the November 8 US Presidential election adds a degree of uncertainty to the global trade outlook, which would weigh on Hong Kong if he decides to impose tariffs on Chinese imports, coupled with other potential protectionist economic policies in Asia.

Meanwhile, the SAR's trade services export growth remained in negative territory for the fifth straight quarter, contracting by 1.8% in Q316, and we expect that it is likely to remain weak over the coming months. Mainland tourist arrivals to Hong Kong (accounting for around 75% of total visitor arrivals) will continue to be negatively impacted by anti-mainland sentiment. Indeed, thousands have taken to the streets on November 8 to protest against an anti-independence legal intervention by the Chinese government, which sought to undermine the 'one country, two systems' rule. In addition, expectations of further Chinese yuan depreciation against the Hong Kong dollar will also dampen tourist arrivals from the mainland. Furthermore, weak tourism arrivals from the mainland will also weigh on the territory's retail sales and private consumption growth over the coming months.