Trade jitters and bearish equities weigh heavily on Hong Kong's 2019 GDP growth forecast

The economy is poised to grind to a halt at 3% in 2019 from 4.7% in Q1.

As trade tensions escalate with Beijing firing back at the US with retaliatory tariffs on US$60b of goods, the growth prospects of Hong Kong is increasingly dimming as the SAR is caught smack in the middle of the tit-for-tat tariff war. 

Also read: Trade war could cut 1% of Hong Kong GDP

After opening the year on strong footing with an economic expansion of 4.7% in Q1 that's the highest in nearly seven years, the Hong Kong economy markedly slowed down to 3.5% in Q2 on the back of mounting trade tensions.  

The downward spiral expected to continue with Fitch Solutions expecting real GDP growth to taper off to 3.6% by end-2018 and 3% in 2019. “We expect the mainland Chinese manufacturing sector to be negatively impacted by the ongoing US-China trade tensions over the coming months, and this is likely to weigh on the SAR’s exports to the mainland, with re-exports accounting for more than 50% of its total exports,” added Fitch Solutions. The SAR is heavily reliant on the manufacturing sector of the Mainland to which since it surrendered the bulk of its manufacturing operations.

As a small and export-dependent economy where merchandise trade accounted for 157.4% of 2017 GDP, the SAR stands along with Singapore, Taiwan and South Korea whose economies stand to be the most affected by US tariffs on Chinese goods via supply chains, according to a research note by asset management firm Schroders. 

Deputy government economicst Adolph Leung estimates that the amount of Hong Kong’s re-exports to China with origin to the US that stand affected by the US list of goods with additional levy falls at around 3.5% of total exports or $136b. 

Also read: Trade war could cost one in five Hong Kong jobs

Semiconductor and related products, which accounted for the lion’s share (44%) of the SAR’s total exports and served as the growth engine of trade activity, is also expected to decline sharply on the back of increasingly strained US-Sino relations.

This is because Fitch Solutions believes that export growth of semiconductors to the Mainland may have already peaked in May, in line with slower sales forecasts by the World Semiconductor Trade Statistics. A downward trend is already unravelling as shown when the Bloomberg Asia Pacific Semiconductors Equity Index entered into contractionary territory in September after falling 5.1% YoY.

The downfall doesn’t stop there. Consumer spending, which boosted GDP growth in Q1, is expected to be another casualty amidst declining equity performance. The local stock market entered bear territory in September 11 wiith the Hang Seng Index down more than 20% from its January peak as mounting trade tensions and emerging market-sell off hit investor sentiment hard.  

“The performance of the Hang Seng Index has a strong positive correlation of approximately 0.6 with Hong Kong’s private consumption growth over the past three decades,” added Fitch Ratings.

Retail sales have already booked their first single-digit growth in July after five straight months of double-digit expansion on the back of souring consumer sentiment. "The trend on Hong Kong stocks remains bearish, and in our view, this poses downside risks to consumption growth over the coming quarters," concluded Fitch Solutions.