Hong Kong's GDP may have grown 4% in 3Q11

All eyes will be on whether Hong Kong entered a technical recession (two consecutive quarters of negative q/q growth) following a 0.5% q/q contraction in Q2. We believe it is a close call, based on our y/y growth forecast of 4.0% (versus 5.1% y/y growth in Q2).

In any case, we believe the ‘recession’ label is misleading, as domestic demand is likely to have remained strong last quarter thanks to a tight labour market and income growth. Much of the drag on headline growth is likely to have come from net exports. September’s disappointing 3.0% y/y decline in exports is a timely reminder that the external sector remains weak. This should translate into a further deterioration in headline growth in the coming quarters – possibly bottoming out at a still-positive y/y rate in H1-2012 before rebounding.