Steep rebound unlikely for Hong Kong: Hang Seng Bank

Latest Q3 GDP points to sizeable slacks remaining.

The advance release of Hong Kong’s Q3 GDP suggests a bottoming out of the slowdown, albeit the economy continued to grow at a below-trend pace, says Hang Seng Bank in a report. Overall, it expects GDP to recover gradually to around trend but do not foresee a steep rebound.

"Growth should climb up to around 2.5% in Q4 and settle near 3% in 2013. This outlook implies that sizeable slack is likely to remain, hence keeping inflation at contained level for coming months," it said.

Here's more from Hang Seng Bank:

Real GDP printed a 1.3%1 increase in Q3 following an expansion of 0.9% in the first half. The outturn follows relatively optimistic Q3 GDP releases in mainland China and other Asian countries.

Encouragingly, the recovery was not due to base effects. The city resumed quarter-on- quarter expansion of 0.6% after shrinking 0.1% in the preceding quarter. That confirms our long-held view that the economy has seen its bottom of this cycle in Q1.

Looking into the details, nascent recovery in domestic demand helped to offset a slowdown in external demand. The stabilisation in consumer and investment sentiments partly reflected the positive effects of policy easing put in place earlier this year.

The government has fine-tuned its 2012 growth forecast from 1-2% to 1.2%. The solid Q3 economic growth and upbeat October data lead us to become increasingly convinced that a modest recovery is underway. There remain, however, challenges ahead in the global economy. Our forecast continues to look for a moderate growth through the remainder of 2012 and 2013. We call for a full-year growth of around 1.5% this year and penciled in a 3% growth in 2013.

Domestic demand shows signs of life

As to the specific components of growth, the pickup in GDP growth was mainly attributable to a rebound in domestic demand. Consumption remained the primary engine of growth, albeit growing at slower pace than previous quarters. Private consumption expanded 2.8%, underpinned by favourable labour market conditions and positive wealth effects from elevated home prices. That added 1.8 percentage points to headline growth.

The data also ease concerns about a sudden slump in capital expenditure. Improved business sentiment translated into another quarter of expansion in business investment.

Public investment in building and construction, which rose 5.1%, provided some support as well. On net, gross fixed capital formation growth accelerated from 5.7% to 8.7% in Q3, contributing 2.0 percentage points to growth.

Offsetting domestic demand’s improvement, however, was lackluster performance in external sector. Facing continued external headwinds, exports growth stayed weak at 3.1% despite some recent signs of stabilisation. Imports gained at a faster pace of 4.0%, probably due to resilient domestic demand. Those left a trade surplus of HKD24.7 billion, 24% less than the surplus last year. Consequently, net exports posted a larger drag of
1.6 percentage points compared with a negative contribution of 1.2 percentage points in
Q2.

Downside risks ease but no steep rebound

Leading indicators such as PMI and Quarterly Business Survey confirm that domestic demand is beginning to strengthen. This, along with robust performances seen in exports and retail sales in October, points to a modest acceleration of Q4 GDP growth.

However, it may be too early to claim that the city is on a solid recovery path given the myriad uncertainties in key export markets. The Euro area remains in recession. The prospect of a full fiscal cliff resolution in US is highly uncertain. Growth in mainland China may have bottomed out but we do not look for significant acceleration in economic activity anytime soon.

The contribution from consumption is unlikely to increase much, considering softening of labour market conditions. A sharp turnaround in growth will then be contingent upon a reacceleration in investment, but we see business spending remain on a modest upward trajectory given the fragile global macro environment.