External weakness soon to hit Hong Kong economy

After steady growth early this 2015.

Hong Kong's economy grew by 0.4% q-o-q in Q1 2015 on a seasonally adjusted basis, in line with consensus expectations.

According to a research note from HSBC Global Research, the y-o-y growth rate fell to 2.1% compared with 2.4% in Q4 2014.

Domestic demand remained relatively robust with the labour market stable and consumer price inflation falling.

However, this could be offset in the next few quarters by a weaker external environment, with the sustained slowdown in Mainland China and US economic data also faltering recently.

Here's more from HSBC Global Research:

Hong Kong GDP increased by 0.4% q-o-q in Q1 2015, in line with consensus expectations up from the downwardly-revised rate of 0.2% q-o-q in Q4 2015.

This represented a 2.1% y-o-y increase over Q1 2014, down from an upwardly-revised growth rate of 2.4% in Q4 2014.

On the expenditure side, private consumption remained strong at 3.5% y-o-y, while investment jumped by 7.3% y-o-y due to higher spending on machinery and equipment. Exports of goods grew slightly by 0.4% y-o-y, but there was a 0.6% fall in services exports.

In terms of contributions to y-o-y GDP growth, the main source of growth was still from private consumption although the contribution fell slightly. This was partially offset by a larger positive contribution from investment and a smaller drag from net exports.

The SAR government has maintained its full-year 2015 GDP growth forecast of 1-3%, unchanged from the Budget back in March. However, it lowered its headline CPI inflation forecast from 3.5% to 3.2% for 2015.

Implications - While the headline y-o-y GDP growth rate moderated slightly in Q1, sequential q-o-q growth actually picked up. The main source of growth was still domestic demand, while exports were only marginally better. Looking deeper at the export breakdown, there was a sharper drag from exports of services, likely linked to the slowdown in tourist arrivals this year.

Domestic demand could be helped by the decline in inflation, with headline CPI inflation likely to fall over the course of 2015 as a number of base effects fall out of the y-o-y calculations (e.g. removal of electricity subsidies last year).

The labour market has also been relatively robust, with the headline rate of unemployment unchanged at 3.3% (below historical average) for the past nine months.

However, the risks for Hong Kong's economy in the rest of 2015 are to the downside. This is mainly due to a weaker external demand environment.

The deepening slowdown in Mainland China is likely to mean import and export trade services - the largest sector of Hong Kong's economy - will not see much support in the coming quarters. Indeed, the most recent HSBC Hong Kong PMI surveys have suggested orders from the Mainland have been contracted at a faster pace than overall new orders.