Sharp drop in travel service exports alarmed Hong Kongers the most

Tourists would probably stay spending selectively.

Amid the shock brought about by the news that Hong Kong's 2Q14 GDP edged down to 1.8% yoy, slower than the revised growth rate of +2.6% in 1Q14 and the weakest growth since 3Q12, the sharp drop in travel service exports was the most concerning element.

According to a research report from Bank of America Merrill Lynch, it had expected the exports of travel services to fall given its close correlation with Mainland visitor arrivals and retail sales.

The report recalled that inbound Mainland tourists slowed to +6.9% yoy in June, the first single-digit growth rate since Feb-2011 and a much weaker pace of growth than what was witnessed in recent months.

Here’s more from Bank of America Merrill Lynch:

That said, the slump to -11.5% from +10.2% last quarter was much poorer than expected.

We attribute this to lower tourist expenditure as tourists curbed spending on gifts on the back of the ongoing thrift and anti-corruption drive.

In addition, the yoy decline in travel services exports was magnified further by the unfavorable base due to the gold rush last year.

According to our estimate, tourist spending takes up about 38% of HK’s retail sales, while spending by local residents accounts for about 62%.

The former is recorded as exports of travel services, while the latter is included in the private consumption component.

Looking ahead, amid the structural economic slowdown in the Mainland as well as the ongoing graft-busting campaigns, tourists will probably stay selective in their spending and their interests in luxury goods like jewelry and watches may remain restrained, especially with a high comparison base, which is unlikely to get any easier until 4Q14.