Here's why Hong Kong's economic growth momentum will slow over the coming quarters

A slowdown in the expensive housing market is one of the reasons.

The Hong Kong economy expanded by 4.3% y-o-y in real terms in Q117 from 3.2% y-o-y in the previous quarter, which marked the fastest quarterly pace of growth since June 2011, and analysts at BMI Research are upgrading our 2017 real GDP growth forecast to 2.5% (versus 1.7% previously) due to the outperformance.

According to the Census and Statistics Department (Censtatd), both strengthening external demand and resilient domestic demand were factors behind the Special Administrative Region (SAR)'s strong performance.

"In addition, we reckon that the outperformance in Q117 was also partially due to the low base attributed by the weak growth seen in Q116. That said, despite the upward revision to our 2017 real GDP growth, we expect Hong Kong's economic growth momentum to slow over the coming quarters."

Here's more BMI Research:

Mainland's Slowing Growth To Weigh On Territory's Trade Prospects

Firstly, the SAR's merchandise trade has benefitted from the mainland economy's cyclical recovery, with Q117 exports and imports increasing by 9.2% y-o-y and 9.9% y-o-y, respectively, but this is unlikely to be sustained as the mainland Chinese economy resumes its slowdown. As we have written previously, we believe that China's economic growth cycle is coming to a peak and will start to decline over the coming quarters.

The Chinese authorities will continue to look to rein in the economy's reliance on easy credit through gradually tightening monetary policy and increasing the scrutiny on the shadow banking sector. At the same time, declining credit impulse will negatively impact investment growth and manufacturing activity.

In addition, the Chinese government has also started to pull back its aggressive fiscal support, with growth in fiscal spending slowing to 16.3% y-o-y for the first four months of 2017 (versus 21.0% y-o-y in Q117), and this will also weigh on the mainland's economic activity. With the majority of Hong Kong's trade either bound for or originating from the mainland, trade and investment prospects for the territory are likely to weaken over the coming months.

Still Factoring In A Slowdown In The Expensive Housing Market

Secondly, Hong Kong's overvalued housing market continues to be a key source of uncertainty for the economy, and we continue to expect a slowdown in the sector, which is likely to weigh on the territory's domestic demand and overall economic growth.

Property prices have reached new highs despite the cooling measures implemented by local authorities in November 2016, and in our view, housing affordability remains a key concern. The pace of property price increases is increasingly unsustainable, and while it is difficult to accurately ascertain the exact timing of the correction, the market faces downside pressures.

Firstly, Hong Kong's interest rates are set to rise along with that of the US due to the Hong Kong Monetary Authority (HKMA)'s currency peg to the US dollar, and this will eventually weigh on investment and owner-occupier demand.

Indeed, our US team's outlook for interest rates is further hikes of 25bps in 2017, 50bps in 2018, and 50bps in 2019 from the current range of 0.75% to 1.00%. Secondly, the government is looking to increase the supply of houses.

For example, according to the FY2017/18 budget, the Hong Kong Housing Authority and Hong Kong Housing Society will look to build 94,500 units of public housing over the five-year period from 2016/17 to 2020/21, while the potential land supply for FY2017/18 will have the capacity to produce about 32,000 units. House prices will therefore suffer from both falling demand and rising supply.

Wealth effects stemming from rising property prices and equity market have been an important driver of Hong Kong's private consumption, and therefore, we expect the city's households spending ability to be hampered by the slowing housing market over the coming months.