'Black swans' warning as HK economy lifts

Hong Kong saw strong economic growth in the second quarter of this year with buoyant exports and full employment status. But, economists have warned of uncertainties on the horizon, arising from geopolitical risks in the region, higher interest rates and a backlash from a possible downturn in the local property market. Qilai Shen / Bloomberg

Headwinds loom large and city can't afford to rest on its laurels: Experts

The good news is Hong Kong's economy is on firm ground — strong GDP growth, buoyant exports, resilient domestic consumption and full job status backed by a pick-up in global trade.

The city's latest economic data, indeed, may be a cause for celebration, but economists have warned against self-complacency, citing, among other things, looming geopolitical risks in the region, US interest-rate woes and the possibility of local homes prices coming down as the Chinese mainland tightened its screws on capital outflows, which could cast the city's economy into turmoil.

Hong Kong saw its economic growth exceed the 10-year average in the second quarter of this year — the third consecutive quarter of above-average expansion — prompting the government to revise its full-year economic growth forecast upwards by 1 percentage point.

In the April-to-June quarter, the SAR's GDP grew 3.8 percent from the same period last year after the local economy went up 4.3 percent in the preceding quarter — the fastest pace of growth in nearly six years. In the first half of 2017, the economy expanded 4 percent year-on-year.

Goods exports saw remarkable growth in the second quarter, up 5.6 percent year-on-year, as an improving world economy lent weight to Asian exports. Services exports rose 2.3 percent in the same period, while private consumption grew briskly at 5.3 percent and overall investment spending firmed up 8 percent year-on-year.

Explaining the administration's upbeat stance on the local economy, Andrew Au Sik-hung, deputy government economist, said earlier this month: "With an improving global economy and vibrant domestic demand, underpinned by a full-employment labor market and rising incomes, as well as resilient investment demand fueled by construction and infrastructure activities, we decided to raise the GDP growth rate forecast from 3 to 4 percent for the full-year of 2017."

Financial Secretary Paul Chan Mo-po had expected the city's economy to grow at a rate of 2 to 3 percent when he unveiled the government budget in February this year. Banking giant HSBC Group's wholly-owned subsidiary Hang Seng Bank - one of Hong Kong's largest commercial banks - lifted its forecast for the city's GDP growth to 2.8 percent for 2017 following the release of the first-quarter growth figures in May.

Economists said a stable jobs market, plus a booming assets market and strong export performance, may further bolster economic growth for the rest of the year.

"A strong labor market and favorable financial market conditions should continue to support household spending. We expect private consumption to remain as the main growth driver for the Hong Kong economy," asserted Thomas Shik, acting chief economist at Hang Seng Bank.

Hong Kong's labor market is in full-employment status, with unemployment in the second quarter holding at just 3.1 percent. Rising household disposable income is conducive to foster positive consumer sentiment that boosts private consumption expenditure.

"We expect trade growth to continue benefiting from the improvement in the external environment. There've been signs that growth in the Eurozone and the US may pick up this year and that growth in the Chinese mainland should remain steady," said Shik.

In its economic report in August, OCBC Wing Hang Bank said: "In the months to come, we expect exports to grow further, given sustained growth in the global economy and receding trade protectionism. A relatively weak Hong Kong dollar will support exports."

Economists on the other side of the fence are more cautious, noting that many economic, financial and geopolitical risk factors have not been taken into account amid the rosy forecasts.

Their main concern is that black swans in world financial markets may apply the brakes on market liquidity that's fueling Hong Kong's economic growth through the booming stock and property markets.

Hong Kong's red-hot homes sector has been instrumental in pushing local economic growth as high assets prices spur household spending.

Local property price rises moderated to 0.7 percent in June this year, compared with a 2.7-percent hike in April, while the number of residential homes transactions fell to 3,500 in July — less than half of the 20-year average of 7,300 — according to Au.

Despite the slowdown, local homes prices in June were still 94 percent higher than the peak level recorded in 1997. But, the mortgage payment to income ratio worsened further, with 67 percent recorded in the second quarter, which was much higher than the 20-year average of 45 percent, according to the latest government data.

The government has warned of a "twist" in property prices that could dampen the economic outlook. "This is because the US Federal Reserve is likely to gradually pursue interest-rate normalization and trim its ballooning balance sheet. In addition, some 98,000 new residential flats will be available in the coming three to four years, a record high," Au said.

Kevin Lai, an economist at Daiwa Capital Markets, said the Hong Kong financial market has underestimated the risk of interest-rate hikes.