Hong Kong GDP growth to recover after bottoming out in Q1

Private consumption and investment growth will prop up the struggling economy.

Hong Kong's GDP growth is expected to recover after a weak start to the year with the economy expected to expand by 2% by end-2019, according to Fitch Solutions.

"Private consumption and gross fixed capital formation, the two main drags on growth in Q119, will likely pick up over the coming months. The former, due to renewed buying momentum and the latter, due to a stronger-than-expected Mainland Chinese economy," the firm said in a report.

The economy grew by a weak 0.5% in Q1 as private consumption slowed to 0.1% from 3.1% in the previous quarter and goods exports fell to 4.2%. Contraction in gross fixed capital formation also deepened, to 7.0% from -5.4% in the previous quarter. Government consumption growth slowed as well but remained relatively steady at 4.5% in Q1 from 5.0%. 

However, the worst may already be behind Hong Kong with investment growth likely to recover as China bounces back through a wide range of stimulus measures which includes a $295.31b (CNY2t) tax cut for businesses and a series of required reserve ratio cuts to unleash funding for credit-starved firms. Already, the world's second largest economy appear to be on its way to stabilising as PMI has returned to postive territory at 50.5 in March and 50.1 in April, ending four months of contractionary readings.

"We expect the Mainland’s PMI to maintain its expansionary posture over the coming months, which bodes well for Hong Kong’s own manufacturing PMI readings and investment growth," Fitch Solutions said.

Private consumption is likely to grow over the coming quarters, supported by the government's cash handouts unveiled in the latest budget address and recovering property prices which may also spill over to retail sales. Property prices in Hong Kong rose 0.8% y-o-y growth in prices on a 3-month moving average (3MMA) basis in February, coinciding with a 1.0% y-o-y contraction in retail sales, also on a 3MMA basis, data from the Centa-City Index show.

Gains, however, may be short-lived. "We highlight that while we expect property prices to pick up over the coming months, we do not expect this to be lasting trend, especially as the high volume of transactions push prices up in a self-fulfilling prophecy, which could once again see demand wane due to unaffordability," Fitch Solutions said.