The second quarter of 2009 has seen the Hong Kong economy emerge from the worst recession since the Asian financial crisis, as real GDP resumed growth for the first time since the first quarter of 2008. Data released by the Census and Statistics Department on Friday (14 August) showed that real GDP rose 3.3% in seasonally adjusted terms from the previous quarter, reversing the 4.3% contraction in the first quarter that represented the biggest slump on comparable record. In year-on-year (y/y) terms, the economy contracted 3.8% in the second quarter, moderating sharply from the 7.8% slump recorded in the three months through March, which was also the biggest decline since the Asian financial crisis in 1998. The rate of contraction in the second quarter was smaller than the advanced consensus forecasts for an annual decline of around 5.0%.

Exports Led the Rebound

The economy's better-than-expected performance in the second quarter was led by recovering trade flows, as the external shock from the world-wide recession has shown signs of easing. Total exports of goods, though still falling, contracted at a much slower pace of 12.4% y/y during the three months through June, compared with a sharp 22.7% decline in the previous quarter. In seasonally adjusted terms, exports expanded a strong 11.6%, after slumping 16.8% in the first quarter. Exports have been hit hard by the collapse in world trade since the world financial turmoil began in late 2008. However, global demand has now ended its free fall, with the world economy seemingly past the worst. The turnaround in the Chinese economy has been especially supportive to regional trade as higher demand has boosted trading activities. Hong Kong particularly benefits from stronger Chinese demand because of its links to the mainland and the dominance of through trade from China. Concurrently, exports of services registered a slightly slower decline in the second quarter, down 5.7% y/y compared with a 6.3% contraction in the previous quarter. The improvement in financial services and the more positive trading environment has helped service exports, although these have been partly offset by weakness in the tourism sector on the back of worries over swine flu. Meanwhile, imports fell at a slower pace as well, reflecting improving consumer demand. Imports of goods declined 12.4% after contracting 22.7% in the previous quarter, while imports of services were down 5.6% compared with the previous quarter's 9.6% decline.

Household Spending Improves, But Private Investment Slumps Further

Domestic demand showed mixed results as the business sector continued to slump despite a rebound in consumer confidence. A flood of liquidity has aided a strong rally in asset markets. Capital has been flowing into the territory to take advantage of the reviving Chinese economies with related assets. The positive wealth effect from higher asset prices has helped boost consumer sentiment and increased the willingness to spend. In addition to the extremely loose monetary conditions, an additional boost to consumer confidence has also come from the government's fiscal stimulus, such as tax rebates. The contraction in private consumption consequently narrowed sharply to 1.0% y/y during the three months through June, from the 6.0% decline of the previous quarter. Business sentiment, on the other hand, has remained rather insecure, undermined by the slump in earnings and eroded pricing power. Gross domestic fixed capital formation contracted 14.0% y/y, following a 13.7% decline recorded in the first quarter, although this was still lower than the 17.8% drop in the fourth quarter. Outlays on machinery, equipment and computer software plunged 18.0%, widening from the 6.6% fall in the previous quarter. Expenditure on buildings and construction, however, fell at a slower rate of 5.9% compared with the previous quarter's 10.9% decline, as real estate construction benefited from a rebound in the property market.

Outlook and Implications

The results in the second quarter have been encouraging, and hopes for a further improvement in coming quarters have increased. Hong Kong's open and trade-dependent economy has been victimised by the world economy's severe recession because of its role as a global trade and finance center. However, with signs of a global recovery emerging, and with continued stabilisation in the world financial markets, global demand has shown a gradual improvement in recent months. Recent data releases suggest the increasing possibility of a modest recovery in the world economy thanks to aggressive reflationary policies around the world. In particular, the massive fiscal and monetary stimuli provided by the Chinese authorities have resulted in a strong rebound in the Chinese economy and prompted a more positive outlook in the short term. Hong Kong will consequently continue to benefit from the positive feedback loop of Beijing's stimulus measures as the territory's through-trade rebounds further. Moreover, abundant liquidity has kept interest rates low and monetary condition loose. These, coupled with the encouraging Chinese outlook, have led to a strong rally in local equity prices and property values. Consumer sentiment, as a result, will be lifted by the wealth effect and local authorities' relief measures. Nevertheless, corporate confidence has remained weak, highlighted by continued cutbacks in private investment. While uncertainties remain high on external fronts given the fragile state of the world recovery, firms will stay rather cautious in terms of spending, which will further pressure the job market and wage growth. IHS Global Insight currently projects Hong Kong's economy to contract by 2.9% in 2009, followed by a mild recovery in 2010, although the outlook remains dependent on the continued revival in world trade.

Global Insight (Reino Unido)