Thanks to robust private consumption and investment.
The strong momentum in Q1 was carried on to Q2 as the Hong Kong’s economy grew 3.8% year-on-year, beating market expectations again and prompting the Hong Kong government to revise its GDP growth projections upward to between 3 percent and 4 percent in 2017, according to Natixis.
Private consumption and investment led the growth (with 5.3% and 8.0%, YoY growth, respectively) and both contributed more to GDP growth compared to the last quarter.
Robust domestic demand but also China’s relatively strong economic growth are the key factors behind Hong Kong’s positive outlook. Still, Mainland touristsrelated spending saw contraction in Q2 (-2.1% in June) while the local spending like motor vehicles sales buoyed.
Here's more from Natixis:
The property market seems to have reached a “wait and see” attitude after very fast price increases. After renewed tightening measures, the number of transactions fell by over 2000 units in July but the seemingly cooling market failed to bring down purchase or rental prices. This seems to indicate that such macro-prudential measures are insufficient to rein in housing prices amid very large capital inflows and excess liquidity.
Regarding financial conditions, HKD touched its historical low on Aug 7 since January 2016 pushed by large interest rate differential against the USD (a very weak HIBOR with respect to LIBOR).
This automatically triggered the HKMA sale of Exchange Fund Bills, following the rules supporting Hong Kong’s currency board. The announcement managed to strengthen the currency temporarily but already on Aug 9, the HKD reverted back to its depreciation trend as the interest rate differential has not really narrowed.
All in all, the Hong Kong economy has been stronger than expected during the first half thanks to large capital inflows from the Mainland as well as robust domestic consumption. However, such large capital inflows are the source of excess liquidity which is pushing Hong Kong rates down, below USD rates, and thus depreciating the HKD. An immediate consequence is forex intervention by HKMA and uncertainty as to the way forward.
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