- Hong Kong's real GDP shrank 7.8% in the first quarter, the largest contraction recorded since the third quarter of 1998 when Hong Kong was plagued by the Asian financial crisis, reflecting a collapse in both domestic and external demand.
- Recent economic reports seem to suggest that the first quarter may have marked the bottom of the economic cycle. The Hong Kong PMI index climbed in May. Unemployment rate, exports and retail sales were less negative in April.
- Market sentiment is also more positive, fuelled by a rally in the stock and property markets. However, it should be warned that as market sentiment has gone far ahead of economic fundamentals, a sharp turnaround could not be ruled out.
- Given the openness of the Hong Kong economy and its dependence on external demand, recovery in consumer demand in the US and Europe is most crucial for a sustained recovery of the local economy. Consumers in these markets still have to contend with shrinking wealth, exceptional levels of debts and rising unemployment and therefore look unlikely to substantially increase spending anytime soon.
- The global economy is not out of the woods yet even though the pace of contraction may be easing. We have thus revised down Hong Kong's 2009 export forecast to a double-digit decline of 12.0% from an initial estimate of a drop of 7.5%, which is likely to drag Hong Kong into a deeper recession. We now see Hong Kong's real GDP contract 5.0% in 2009, more severe than our initial estimate of a decline of 3%.
A Steeper-than-Expected Contraction in 1Q GDP
Hong Kong's real GDP shrank 7.8% in the first quarter, the lowest since September 1998 when Hong Kong was plagued by the Asian financial crisis. The sharper-than-expected contraction reflected a worse-than-expected collapse in both domestic and external demand.
The external demand shrank more than the 1997-98 cycle, declining 19.6%, compared to a 6.4% and 7.7% drop in the third and fourth quarter of 1998 respectively. Domestic demand also plunged 7.5%, although less severe than the double-digit declines recorded in the third and fourth quarter of 1998.
The latest economic indicators seem to show early signs of stabilization, fitting our view that the economic downturn might be bottoming in the first half of 2009. But it does not imply a recovery is imminent.
We believe the global and local economies are not out of the woods yet and do not expect positive year-on-year growth for the whole of 2009. We have thus revised down this year's GDP forecast for Hong Kong to a contraction of 5.0%, from an initial estimate of a decline of 3%.
The government sees a gloomier prospect, revising down this year's GDP forecast to a contraction of 5.5% to 6.5% from an initial estimate of a decline of 2% to 3%. Recognising the severity of the recession, the Chief Executive launched an extra HKD16.8 billion of stimulus measures, including temporary tax cut, waivers on property rates and public rentals.
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