Why Hong Kong’s 2Q figures do not spell a downturn

Growth drivers still on track.

Amid the unease brought about by the surprise of Hong Kong GDP growth slowing to 1.8% in the second quarter, this question is asked: Do the second quarter figures mark the beginning of a downturn? And the opinion Hang Seng Bank is, no, they do not.

According to a research report from Hang Seng Bank, in its view, the main reason why the Hong Kong economy will not deteriorate from here is that most of the growth drivers it identified at the start of the year remain on track: highly accommodative monetary conditions, improving external demand and resilient labour market conditions.

The bank remains hopeful of an export turnaround in the second half as growth inadvanced economies and mainland China picks up, albeit at a more modest pace of recovery compared to past cycles.

Here’s more from Hang Seng Bank:

Second-quarter GDP in the US provides more evidence of a gradual economic recovery. Potential easing measures will also help keep the Mainland’s growth momentum relatively solid down the road.

Another reason to resist becoming too gloomy about the economy is that the weakness in domestic demand was likely inflated by several one-off factors.

The base effect relating to gold purchases last year is likely to be less challenging in the second half of the year. The buoyant property market conditions could provide a positive wealth effect.

We also think it is too early to assume that investment has entered a steady downward trajectory.

As confirmed by the latest reading of the Purchasing Managers’ Index, the stance of corporations towards capital spending has turned more favourable, though this mainly reflects the replacement of equipment and not a sustained expansion of capacity.

If our forecast materialises, a revival in domestic demand will provide an important initial source of lift.

For now, we see no reason to alter our quarterly projections for the second half.

Our full-year GDP growth forecast remains unchanged at 2.8%, which envisages further acceleration in growth for the second half of 2014.

The economy is therefore unlikely to decline for two consecutive quarters on a quarter-on-quarter basis to end up in a 'technical recession.'