Lackluster economic performance not the start of Hong Kong's slowdown

Two straight quarters of decelerating growth.

The Hong Kong economy has now experienced two straight quarters of decelerating growth for the first time since 2011.

According to a research note from Hang Seng Bank, however, the key question is how much of this weakness is due to temporary factors.

Despite the general pessimism, the analysis' view is that most of the shortfall in trade activity relative to Hang Seng Bank's expectations is related to transitory factors such as severe weather conditions and the West Coast port strike in the US, and it does not, therefore, put much weight on the weakness in Q1 exports.

On the other hand, financial markets have turned less bullish on the US dollar as the outlook for the US has become less favourable.

Here's more from Hang Seng Bank:

We are expecting a confluence of factors – improving demand from the US as well as a more stable US dollar – to boost the city’s trade flows over the coming months.

If we are interpreting the data correctly, a positive turnaround in trade activity is likely to occur over the coming months.

However, we may see continuing weakness in consumption and service exports for some time. With recent changes in multiple-entry visa arrangements for Shenzhen residents and the impact of the strengthening Hong Kong dollar, domestic service providers appear to be facing stiff headwinds.

It is also currently hard to imagine that private consumption in upcoming quarters will be as strong as it was before 2011, although recent equities gains will provide a buffer for consumption.

That said, our view is that growth contributions from consumption are likely to be of secondary importance in the near future, with investment activity and exports of goods taking centre stage.

Overall, our opinion is that this is not the start of an economic slowdown in Hong Kong. We remain relatively sanguine over the outlook for the Hong Kong economy, although we do not foresee a breakout in growth as economic headwinds are likely to persist into the second half.

Reflecting the soft start to 2015 and the weaker-than-expected tourism flows, we have trimmed our full-year GDP growth forecast for 2015 from 2.6% to 2.4%.