Hong Kong's slightly underperformed our forecast for 2015, achieving real GDP growth of 2.4% versus our expectations for a 2.5% expansion. We expect 2016 to be a more difficult year in the territory as a more acute downturn in mainland China and a deepening domestic property price correction act as stout headwinds, and we have downgraded our real GDP forecast for the year to 1.7% from 2.3% previously.
In line with our expectations, a correction has taken hold in the Hong Kong residential property market. Price declines are set to continue in 2016 as supply constraints fade and interest rates rise. At the same time, affordability is extremely stretched relative to median household incomes, and we believe that the confluence of these factors spell a difficult outlook for the property sector over the coming years. This will hit both construction activity as well as the financial services sector in the territory.
Hong Kong's quadrennial legislative elections in September are unlikely to produce a significantly different government than the one currently in power in the city-state, as the failure to achieve universal suffrage has left intact a hybrid-electoral system that favours the pro-Beijing camp. Meanwhile, Beijing's grip on the city-state will continue to strengthen over the coming years as the Xi administration maintains a politically conservative line. This will likely entail a further widening of the gulf between the electorate and the government, which could have implications on Hong Kong's long-term social stability outlook.
The potential for a financial or economic crisis in China continues to be by far the biggest risk factor for Hong Kong. Such a crisis would hit Hong Kong hard given its deep trade and financial linkages to the mainland, and the high proportion that financial and trade services comprise of Hong Kong's economy. We also continue to see a tail risk of a Hong Kong dollar devaluation (taking the form of an adjustment to the currency's peg versus the US dollar) in the event that volatility in the Chinese yuan ramps up again. Hong Kong's increasingly deep ties with the mainland could make it difficult for policymakers to maintain the peg versus the US dollar should the CNY experience an acute sell-off, thereby putting downwards pressure on the decades-old peg.
|BMI/Census and Statistics Department|
|Nominal GDP, USDbn||290.9||308.9||320.3||334.7|
|Real GDP growth, % y-o-y||2.5||2.4||1.7||2.2|
|Consumer price inflation, % y-o-y, eop||4.9||2.4||2.0||2.5|
|Exchange rate HKD/USD, eop||7.75||7.75||7.77||7.77|
|Budget balance, % of GDP||3.3||2.7||2.5||2.4|
|Current account balance, % of GDP||1.8||2.9||2.7||2.1|
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