Hong Kong 2011 Economic Outlook

8/3/2019 Hong Kong 2011 Economic Outlook

http://slidepdf.com/reader/full/hong-kong-2011-economic-outlook 1/11

Irina Fan Joanne YimSenior Economist Chief [email protected] [email protected]

December 2010

Hong Kong 2011 Economic Outlook: Living with Higher Prices

Exhibit 1: Hong Kong’s Economic Forecast

(% yoy changes) 1Q10 2Q10 3Q10 4Q10F 2010F 2011F

Real GDP 8.2 6.5 6.8 4.7 6.5 4.5

Consumer prices 1.9 2.6 2.3 3.0 2.5 3.7

Unemployment rate 4.4* 4.6* 4.2* 4.0* 4.3 4.0

Export value 26.0 24.3 27.8 11.4 22.0 11.0

Retail sales value 18.8 16.9 17.8 14.7 17.0 11.0

Note (F) Forecast; *period-end Sources: Hong Kong’s Census and Statistics Department, Hang Seng Bank

The latest economic reports were mixed. Export growth eased sharply, retail salesaccelerated and unemployment rate hovered around the 20-month low in October. Thefast cooling demand from advanced economies suggests that risks to growth may skewtowards the downside. The US consumers are still struggling with high unemployment,the sovereign debt issues in Europe remains a concern and the negative impacts of thefiscal austerity programs are yet to be fully reflected.

As such, we expect Hong Kong’s 4Q real GDP growth to decelerate to about 4.7%, whichwill still give a full year average of 6.5%. For the coming year, real GDP growth could easefurther to 4.5%.

Inflation is of greater concern, as a confluence of factors points to rising price pressure.A weakening currency has exposed the highly import dependent Hong Kong economy toimported inflation. Inflationary pressure is also building on rising food prices, housingrentals and wage costs.

Inflationary expectation is also rising after major central banks’ quantitative easingmeasures. Many Asian and emerging economies have experienced massive inflows thathave been translating into rapid credit growth and soaring asset prices.

Inflation could therefore average 2.5% this year and 3.7% in 2011, but risks tilt to theupside.



2

Growth Momentum Weakens

The Hong Kong economy has appeared stronger than expected so far, growing7.1% in the first three quarters, with real GDP growth accelerating to a 6.8% pace inthe third quarter, from 6.1% in the second.

1

A closer look at the third quarter GDP reading found clear signs that the fundamentalforces turned to a much weaker direction. Domestic demand contracted asinvestment was sluggish and inventories turned negative, although consumptionaccelerated. The de-stocking suggested pessimistic business sentiment. On aseasonally adjusted quarter-on-quarter basis, real GDP grew merely 0.7%,compared to 1.4% in the second quarter.

Exhibit 2: Year-on-year growth stays strong Exhibit 3: Sequential momentum turns weak

Real GDP

-10

-5

0

5

10

15

90 92 94 96 98 00 02 04 06 08 10

y o y %

-10

-5

0

5

10

15

y o y %

Sources: CEIC, Hang Seng Bank

Real GDP (s.a.)

-4

-2

0

2

4

6

8

90 92 94 96 98 00 02 04 06 08 10

q o q %

-4

-2

0

2

4

6

8

q o q %


Exhibit 4: External demand eases Exhibit 5: Domestic demand contracts

External Demand

-25

-20

-15

-10

-5

05

10

15

20

25

90 92 94 96 98 00 02 04 06 08 10

%

-25

-20

-15

-10

-5

05

10

15

20

25

%


Domestic Demand

-15

-10

-5

0

5

10

15

20

90 92 94 96 98 00 02 04 06 08 10

%

-15

-10

-5

0

5

10

15

20

%


1

Changes throughout the report are on year-on-year basis unless otherwise stated.



3

Exhibit 6: GDP Growth

Quarterly (yoy %) Annual (yoy %)

3Q09 4Q09F 1Q10 2Q10 3Q10 2009 2010F

Private Consumption 0.6 4.8 7.1 4.4 5.7 -0.4 --Government Consumption 3.4 2.0 3.4 2.7 3.4 2.4 --Gross Domestic Fixed Capital

Formation3.2 14.1 8.2 15.6 0.3 -1.8 --

Export of Goods -13.2 -2.9 21.6 20.1 20.8 -12.7 --Export of Services 0.8 8.9 17.9 17.1 14.0 0.3 --Import of Goods -8.3 3.3 28.0 23.6 16.5 -9.5 --Import of Services -2.7 2.5 10.9 12.4 9.9 -3.7 --Real GDP -2.4 2.5 8.0 6.5 6.8 -2.8 6.5Note: (E) estimate; (F) forecast

Source: Census and Statistics Department, Hang Seng Bank

Exhibit 7: Contribution to Growth (%)

3Q09 4Q09 2009 1Q10 2Q10 3Q10

Private consumption 0.3 2.8 -0.2 4.4 3.0 3.5Government spending 0.3 0.2 0.2 0.3 0.2 0.3Investment 0.6 2.4 -0.4 1.7 3.1 0.1Inventories 3.4 4.2 1.2 8.4 4.6 -4.9

Net exports of goods &services

-7.0 -7.0 -3.6 -6.8 -4.5 8.0

Real GDP -2.4 2.5 -2.8 8.0 6.5 6.8Sources: Census & Statistics Department, Hang Seng Bank

Downside Risk to Growth

The latest economic reports reinforced views of a less rosy prospect. Export growthdecelerated sharply in October, unemployment rate resisted to go further down,although retail sales accelerated.

The fast cooling external demand suggests that the risks to growth are on thedownside. Ignoring the base effects, export growth has been on a downtrend sinceApril. The seasonally-adjusted month-on-month export growth decelerated to 1.0% inOctober, from over 10.9% in April.

The US consumers are still struggling with high unemployment, the sovereign debtissues in Europe remains a concern and the negative impacts of the global fiscal

austerity programs are yet to be fully reflected.

The International Monetary Fund projects the growth of world trade volume to easesharply to 7% next year, from an estimated 11.4% this year, which does not bode wellfor export-dependent economies like Hong Kong.

Exhibit 8: World Trade Forecast

2009 2010F 2011F

World trade volume (yoy %) -11.0 11.4 7.0

Imports (advanced countries) -12.7 10.1 5.2

Source: IMF World Economic Outlook update October 2010



4

Upside Risk to Inflation

Inflation has appeared benign so far. Consumer prices rose 2.3% in the first tenmonths, as government’s public rental waivers and property rates concessions havesuppressed the headline CPI reading. Nevertheless, a slew of factors indicate risingprice pressure ahead.

Imported inflation

A weakening local currency exposes the highly import-dependent Hong Kong economyto imported inflation. The Hong Kong dollar has depreciated against most of currenciesof its major suppliers in the last few months: by about 11% versus the Japanese yen

and over 2% versus the Chinese renminbi, Singapore dollar and Korean Won, puttingupward pressure on import prices.

Exhibit 9: Retained Imports from Major Trading Partners

Retained imports (2008)HKD bn % share

HKD exchange rate(% change between3May10 to 30Nov10)

Eurozone 17.0 22.1 1.4Japan 10.8 14.0 -10.5Mainland China 9.2 11.9 -2.4Singapore 7.9 10.2 -2.8South Korea 6.9 9.0 -3.6Others 25.2 32.8 --

Total 77.0 100.0 --Sources: CEIC, Hang Seng Bank, Hong Kong Monetary Authority

Rising food prices

Earlier this year, food inflation was driven by the disruption to food supply due to badweather. But now, the disruption seems not so temporary. Global food prices havegone up by 23% in the first ten months according to data from US CommodityResearch Bureau and have yet to reach a peak.

Global commodities and oil prices also seem to be on an uptrend. The double-digitsurge in crude oil prices and supply shock in food production were the culprits pushinginflation to decade high in mid-2008, when crude oil prices rose to USD140 a barrel.

Surging housing rental

Private housing rental registered five consecutive months of double-digit growth. Butthe housing component of the CPI basket is a lagging indicator of market rentals, as itcomprises new and existing rental. The lagging effect means the upward pressure ofthe housing rental will persist with a new round of rental resets.



5

Exhibit 10 Exhibit 11

Food Prices

-10

-5

0

5

10

15

20

25

01 02 03 04 05 06 07 08 09 10

y o y %

-10

-5

0

5

10

15

20

25

y o y %

Hong Kong Food Prices

Mainland China Food Prices Sources: CEIC, Hang Seng Bank

Food Prices

-4

-2

0

2

4

6

8

10

12

14

16

18

20

22

06 07 08 09 10

y o y %

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

y o y %

Hong Kong

Global (CBOT) Sources: CEIC, Hang Seng Bank, ReutersEcowin


Housing Prices and Rentals

40

60

80

100

120

140

160

180

92 94 96 98 00 02 04 06 08 10

I n d e x

40

60

80

100

120

140

160

180

I n d e x

Price RentalSources: CEIC, Hang Seng Bank

Private Housing Rentals and Inflation

-30

-20

-10

0

10

20

30

94 96 98 00 02 04 06 08 10

y o y %

-15

-10

-5

0

5

10

15

y o y %

Property rental

CPI (private housing) Sources: CEIC, Hang Seng Bank

Wage costs pick-up

Apart from higher food prices and rentals, wage costs will also start to exert risingpressure on consumer prices in the coming year. Wages in general had reverted to anuptrend since 3Q 2009 along with the economic recovery. The pace of increase haspicked up, with nominal wages rising 4.9% in 2Q 2010, the largest quarterly rise innearly two years. While most workers can expect a moderate increase in salaries inthe coming year, some, particularly those in the catering, retail and cleaning industriescould get bigger increases following the implementation of Hong Kong’s first ever

minimum wage in May 2011.



6


Nominal and Real Wages

-6

-4-2

0

2

4

6

8

10

12

14

16

18

92 94 96 98 00 02 04 06 08 10

y o y %

-6

-4-2

0

2

4

6

8

10

12

14

16

18

y o y %

Nominal wage Real wageSources: CEIC, Hang Seng Bank

Wage and Inflation

-8

-6-4

-2

0

2

4

6

8

10

12

14

16

18

92 95 98 01 04 07 10

y o y %

-8

-6-4

-2

0

2

4

6

8

10

12

14

16

18

y o y %

Nominal wage CPISources: CEIC, Hang Seng Bank

Rising Risk of Asset Bubble

Hong Kong has experienced strong inflows of capital amidst the ultra loose monetarystance of major central banks. Major central banks have printed how much money? Itwas about 19.4% of the aggregate GDP of countries in East Asia and Pacific in 2009!

The highly expansionary monetary condition is also translating into faster credit growth.

The loan to deposit ratio has been on an uptrend since 3Q 2009 . While the total loan-to-deposit ratio jumped from 50% in to 61%, the Hong Kong dollar loan-to-deposit ratioalso surged from 70% to 78% between September 2009 and September 2010.

Exhibit 16: Quantitative Easing

Amount USD billion

QE1 2,145US USD1.725 trillion 1,725UK GBP200 billion 313EU EUR60 billion 44

QE2Japan JPY5 trillion 62US USD600 billion 600

Total (QE1+QE2) 2,745

World nominal GDP 58,228East Asia and Pacific 14,116

Sources: World Bank, Hang Seng Bank

The excess liquidity has found its way to the asset markets. The Hang Seng Index, anindicator of stock prices in Hong Kong, has jumped over 20% in the past five months.Similarly, local property prices are close to their record highs. But, Hong Kong is notalone! Excess liquidity has fueled asset prices in the region. There is a strongconsensus among policymakers to act resolutely to mitigate inflation expectation and toprevent a further ballooning of the asset bubble.



7

Exhibit 17

I n d e x

I n d e x

Economic Forecast

Against this backdrop, we expect Hong Kong’s 4Q real GDP growth to decelerate toabout 4.7%, which will still give a full year average of 6.5%. For the coming year, realGDP growth could ease further to 4.5%. Inflation could therefore average 2.5% thisyear and 3.7% in 2011. But, the risk of inflation is titling on the upside.



8

Hong Kong Retail Sales Volume

yoy % changeSources: Reuters EcoWin, Hang Seng Bank

98 00 02 04 06 08 10

%

-30

-20

-10

0

10

20

30

40

%

-30

-20

-10

0

10

20

30

40

% %

% %% %

Hong Kong's Consumer Price Inflation

Food Prices, excluding meals bought away from homeConsumer Prices

Sources: Reuters EcoWin, Hang Seng Bank

98 00 02 04 06 08 10

%

-10

-5

0

5

10

15

20

%

-10

-5

0

5

10

15

20

% %



9

Hong Kong Total Loans and Deposits

Total loans (3MMA) Total deposits (3MMA)Sources: Reuters EcoWin, Hang Seng Bank

98 00 02 04 06 08 10

%

-20

-10

0

10

20

30

%

-20

-10

0

10

20

30

% %

Exchange Rate and HIBOR-LIBOR Spread

USD/HKD 3M HIBOR-LIBOR spreadSources: Reuters EcoWin, Hang Seng Bank

05 06 07 08 09 10

U S D / H K D

7.74

7.75

7.76

7.77

7.78

7.79

7.80

7.81

7.82

7.83

%

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Hong Kong Property Prices

50

75

100

125

150

175

200

225

250

93 95 97 99 01 03 05 07 09

I n d e x

50

75

100

125

150

175

200

225

250

I n d e x

Private domestic, 40-69.9 sq.mPrivate domestic, 160 sq.m or above


Hong Kong Office and Retail Rentals

-20

-15

-10

-5

0

5

10

15

20

25

30

35

00 01 02 03 04 05 06 07 08 09 10

y o y %

-20

-15

-10

-5

0

5

10

15

20

25

30

35

y o y %

Office rentals Retai l rentalsSources: CEIC, Hang Seng Bank



10

yoy(%) yoy(%) yoy(%) HKD bn yoy(%) HKD bn yoy(%) yoy(%) yoy(%) %

2002 1.8 -4.1 -2.6 3,318 -2.6 2,076 -5.0 -0.9 -3.0 7.3

2003 3.0 -2.2 -0.6 3,567 7.5 2,035 -2.0 8.3 -2.6 7.9

2004 8.5 10.8 9.2 3,866 8.4 2,156 5.9 8.6 -0.4 6.8

2005 7.1 6.8 6.1 4,068 5.2 2,312 7.3 5.2 1.0 5.6

2006 7.0 7.2 5.7 4,757 17.0 2,468 6.7 15.5 2.0 4.8

2007 6.4 12.8 10.1 5,869 23.4 2,962 20.0 20.6 2.0 4.0

2008 2.2 10.6 5.0 6,060 3.2 3,284 10.9 2.6 4.3 3.6

2009 -2.8 0.6 -0.8 6,381 5.3 3,289 0.1 5.2 0.5 5.4

2010F 6.5 17.0 14.0 6,892 8.0 4,111 25.0 7.5 2.5 4.3

2011F 4.5 11.0 7.0 7,436 7.9 4,440 8.0 7.8 3.7 4.0

Q2 2009 -3.8 -5.1 -5.4 6,274 10.0 3,203 -4.3 9.6 -0.1 5.4

Q3 -2.4 -1.1 -1.8 6,424 9.9 3,277 -4.3 9.4 -0.9 5.3Q4 2.5 12.8 9.9 6,381 5.3 3,288 0.1 5.2 1.3 4.9

Q1 2010 8.0 18.8 15.8 6,371 5.8 3,469 9.5 5.7 1.9 4.4

Q2 2010 6.5 16.9 13.6 6,352 1.2 3,773 17.8 1.3 2.6 4.6

Q3 2010 6.8 17.8 15.6 6,736 4.9 4,126 25.9 5.2 2.3 4.2

Jun 2010 NA 15.3 11.9 6,352 1.2 3,773 17.8 1.3 2.8 4.6

Jul NA 19.2 16.2 6,465 2.9 3,844 21.2 3.0 1.3 4.3

Aug NA 17.1 14.9 6,500 3.3 3,939 24.1 3.6 3.0 4.2

Sep NA 17.2 15.8 6,736 4.9 4,126 25.9 5.2 2.6 4.2

Oct NA 21.6 19.6 7,047 8.7 4,201 29.5 9.0 2.6 4.2

YTD 7.1 18.3 15.5 7,047 8.7 4,201 29.5 9.0 2.3 4.2

HK$bn yoy(%) HK$bn yoy(%) HK$bn yoy(%) yoy(%) '000 yoy(%)

2002 1,561 5.4 1,619 3.3 -58.9 -11.1 -15.4 16,566 20.7 7.7980

2003 1,742 11.7 1,806 11.5 -63.3 -12.0 -12.7 15,537 -6.2 7.7630

2004 2,019 15.9 2,111 16.9 -92.0 26.7 4.6 21,811 40.4 7.77352005 2,250 11.4 2,330 10.3 -79.3 18.0 23.5 23,359 7.1 7.7525

2006 2,461 9.4 2,600 11.6 -138.8 0.7 21.2 25,251 8.1 7.7745

2007 2,688 9.2 2,868 10.3 -180.5 11.6 12.1 28,169 11.6 7.8015

2008 2,824 5.1 3,025 5.5 -201.1 16.4 17.9 29,500 4.7 7.7505

2009 2,469 -12.6 2,692 -11.0 -223.3 0.5 -12.8 29,590 0.3 7.7555

2010F 3,012 22.0 3,339 24.0 -326.2 20.0 8.5 36,100 22.0 7.8000

2011F 3,344 11.0 3,706 11.0 -362.1 12.0 5.0 39,349 9.0 7.8000

Q2 2009 615 -12.9 658 -14.9 -43.7 -7.0 -15.8 6,293 -8.9 7.7505

Q3 651 -14.3 724 -10.4 -72.7 3.2 -17.7 7,463 -1.6 7.7505

Q4 669 -2.0 772 3.4 -73.0 23.1 -13.4 8,430 9.0 7.7555

Q1 2010 636 26.0 724 34.3 -88.2 30.3 -1.0 8,625 16.5 7.7645

Q2 2010 763 24.3 854 29.9 -90.9 25.1 10.0 8,231 30.8 7.7855

Q3 2010 832 27.8 898 24.1 -65.9 20.5 12.9 9,320 24.9 7.7615

Jun 2010 268 26.7 298 31.0 -30.6 21.3 11.9 2,620 43.5 7.7855

Jul 262 23.3 292 24.9 -30.5 21.7 12.5 3,137 31.9 7.7645

Aug 290 36.0 302 28.4 -11.9 21.0 12.7 3,455 21.9 7.7805

Sep 280 24.1 305 19.5 -24.4 18.9 13.3 2,728 21.2 7.7615

Oct 274 13.9 296 14.0 -22.3 n.a. n.a. 3,259 18.0 7.7495

YTD 2,505 24.6 2,772 27.2 -267.1 25.0 7.1 29,434 23.0 7.7495

Note: (F) Forecast

Source: CEIC, Hang Seng Bank

HKD per USD(end of period)

Hong Kong Economic Monitor Statistics

GDP (real)Retailsales

(value)

Retail sales(volume)

Total DepositsMoney supply

(Total M3)

Dec 2010

Consumerprices

Unemploymentrate (s.a.)

Total Loans

Tradebalance

ResidentialProperty

Price Index

Office RentalIndex

Tourist ArrivalsExports Imports

Foreign Trade



11

Disclaimer

This document has been issued by Hang Seng Bank Limited (“HASE”) and the information herein is based on sourcesbelieved to be reliable and the opinions contained herein are for reference only and may not necessarily represent the viewof HASE. The research analyst(s) who prepared this report certifies(y) that the views expressed herein accurately reflect theresearch analyst’s(s)’ personal views about the financial instrument or investments and that no part of his/her/theircompensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in thisresearch report. Nothing herein shall constitute as offers or solicitation of offers to buy or sell foreign exchange contracts,securities, financial instruments or other investments. Re-distribution of any part of this document by any means is strictlyprohibited.

The information contained in this document may be indicative only and has not been independently verified and noguarantee, representation, warranty or undertaking, express or implied is made as to the fairness, accuracy, completenessor correctness of any information, projections or opinions contained in this document or the basis upon which any suchprojections or opinions have been based and no responsibility or liability is accepted in relation to the use of or reliance onany information, projections or opinions whatsoever contained in this document. Investors must make their own assessmentof the relevance, accuracy and adequacy of the information and opinions contained in this document and make suchindependent investigations as they may consider necessary or appropriate for the purpose of such assessment. All such

information, projections and opinions are subject to change without notice.

HASE and its affiliates may trade for their own account in, may have underwritten, or may have a position in, all or any of thesecurities or investments mentioned in this document. Brokerage or fees may be earned by HASE or its affiliates in respectof any business transacted by them in all or any of the securities or investments referred to in this document.

The investments mentioned in this document may not be suitable for all investors. Investors must make investment decisionsbased on their own investment objectives, financial position and particular needs and consult their own professional adviserswhere necessary. This document is not intended to provide professional advice and should not be relied upon in that regard.

No consideration has been given to the particular investment objectives, financial situation or particular needs of anyrecipient. Investment involves risk. Investors should note that value of investments can go down as well as up and pastperformance is not necessarily indicative of future performance. This document does not purport to identify all the risks thatmay be involved in the securities or investments referred to in this document.

Documents

Hong Kong 2011 Economic Outlook