Hong Kong's Q3 GDP confirms modest setback

Slowdown was not as bad expected.

It has been noted that intensifying headwinds from China took a clear toll on Hong Kong in Q3, but the damage was not as bad as the market had feared.

According to a research note from Standard Chartered, Q3 GDP growth came in at a higher-than-expected 2.3% y/y (consensus: 2.0%), down from 2.8% y/y in Q2.

On a q/q seasonally adjusted basis, the economy expanded 0.9% in Q3, up from 0.4% prior. Growth in household spending moderated to 4.3% y/y from 6.1% prior, while exports and imports of goods contracted 3.2% and 4.1%, respectively, reflecting the spillover from China’s slowdown.

Here's more from Standard Chartered:

Yet, household spending (private consumption expenditure, or PCE) contributed a decent 2.7ppt to Q3 headline growth, and net exports contributed 2.5ppt as the import contraction outweighed the export decline.

This offset larger drags from investment and net exports of services. The drag from net services exports reflects the challenges facing the tourism sector, as well as increased travel and spending abroad by Hong Kong people. We maintain our 2015 GDP growth forecast of 2.4%.

We expect signs of stabilisation approaching the year-end given the expected modest rebound in China’s growth. Based on monthly data, however, momentum still appears to be weakening on both the external and domestic fronts. Exports to the US, the lone bright spot for much of 2015, returned to negative y/y growth in September for the first time since March.

The contraction in mainland tourist arrivals on a y/y basis remains a key drag on retail sales. The silver lining is that the worst of the impact from the structural shift in mainland tourists’ spending from high-value to lower-value goods may be over.

The onset of more favourable base effects should support growth at the margin in 2016. The likely shallow Fed rate-hiking cycle should also contain the risk of a disorderly residential property market correction. Sentiment could take longer to recover, however, limiting short term upside surprises.