Hong Kong economic activity to remain sluggish in quarters ahead, says Scotiabank

The economic activity of Hong Kong is expected to stay relatively sluggish in the quarters ahead, as the economy is negatively impacted by subdued global and Chinese demand. Hong Kong ships over half of its exports to mainland China and its retail performance reflects mainland tourists’ shopping appetite, noted Scotiabank in a research report.

Any deterioration in the China-U.S. relations in the years ahead might negatively affect Hong Kong’s economy as the nation is a gateway to business between China and the U.S. In the September quarter, the territory’s real GDP grew 1.9 percent year-on-year and 0.6 percent sequentially, as compared with the 1.7 percent year-on-year growth and 1.6 percent quarter-on-quarter growth in the prior quarter. Investment, household consumption and government spending performed well, but the external sector weighed on the economic growth.

“We expect Hong Kong’s economy to expand by 1½ percent in 2016 as a whole, followed by a modest acceleration to 2 percent y/y in 2017-18 that reflects the export sector’s modest recovery”, added Scotiabank.

Meanwhile, the local monetary conditions are majorly determined on the U.S. monetary policy because of the fixed exchange rate. Hong Kong’s interest rates are likely to move in line with developments in the U.S. The U.S. Fed is likely to hike its Fed funds rate by 25 basis points in December 2016. The Hong Kong Monetary Authority’s base rate at present is at 0.75 percent. The nation’s consumer price inflation rose 1.2 percent year-on-year in October, down from the average rise of 2.8 percent year-on-year registered in the initial nine months of this year.

“A modest pick-up in global energy prices will likely take the headline inflation rate toward 2 percent by the end of 2017”, said Scotiabank.