Delayed recovery for Hong Kong following Q2 GDP disappointment

2H14 is seen to do better, though.

Hong Kong reported a 0.1% q/q drop in Q2 GDP, the first contraction since Q2-2011, which has been noted as a setback along the rocky road to recovery.

According to a research report from Standard Chartered, the economy grew a disappointing

1.8% y/y in Q2, slowing from a revised 2.6% in Q1, dragged down by investment and exports of services.

China’s slowdown has hurt investment sentiment, while mainland tourist arrivals have moderated and these visitors are shifting their spending away from high-value items.

Private consumption was more resilient thanks to a tight labour market. Meanwhile, exports of goods were also a bright spot, rising 2.3% y/y and contributing 1.9ppt to headline GDP growth on a net basis, the highest since Q1 -2011.

Here’s more from Standard Chartered:

We still expect Hong Kong to do better in H2-2014 than in H1, driven by China’s stabilising economy, a further recovery in exports to the West, favourable capital flows, and the recent revival in local residential property.

That said, our Hong Kong GDP growth forecasts of 3.5% for 2014 and 4.5% for 2015 look too ambitious given the slower-than-expected start to the year and China’s still-fragile economy (particularly amid reform challenges).

We now forecast more modest growth of 2.5% for 2014 and 3.5% for 2015.

We continue to forecast ‘underlying’ CPI inflation (excluding the effects of one-off government concessions) at 3.5% in 2014 and 4.0% next year, while headline inflation should average around 4.2% over the same period.

Residential property prices have been rebounding since April, surpassing their 2013 peaks. Transaction volumes have also recovered, reflecting pent-up demand.

This resilience, combined with policy prudence, underpins our view that any correction should be orderly and manageable--even as downside risk to residential prices re-emerges ahead of the first Fed hike, which we expect in mid-2015.