Hong Kong's domestic demand slowed amidst sluggish 2Q14 GDP

No thanks to factors like political uncertainty.

In line with the surprise brought about by the reported slowdown in Hong Kong's 2Q14 GDP—which edged down to 1.8% yoy, slower than the revised growth rate of +2.6% in 1Q14 and the weakest growth since 3Q12—the significant slowdown in domestic demand was also noted.

According to a research report from Bank of America Merrill Lynch, private consumption further moderated to +1.2% in 2Q14 from +1.5% yoy last quarter, as the consumer remains cautious amid political uncertainty, a stagnant local property market and a slower-than-expected global recovery pace. On the investment front, overall investment spending fell to -5.6% in 2Q14, much weaker than +3.5% yoy in 1Q14.

Here’s more from Bank of America Merrill Lynch:

In particular, consumption of consumer goods dropped by 9.1% in 2Q14 (vs +5.4% yoy in 1Q14).

Within this category, spending on durable and non-durable goods slumped to -5.1% yoy and -10.6% yoy in 2Q14, after growing +4.0% yoy and +6.3% yoy, respectively.

We are concerned about this drop in consumer goods sales, as it suggests further potential downside risks to domestic demand, despite a solid labor market and positive income growth.

That said, consumer sentiment may improve slightly on the back of the wealth effect amid better stock market performance in the past month.