The Hong Kong economy's Q116 downturn is likely to be a harbinger of a further slowdown, and we have therefore downgraded our 2016 real GDP growth forecast for the territory to 1.2%, versus 1.7% previously. Our downward revision reflects weaknesses in both the domestic real estate market, as well as China-related external headwinds which will continue to undermine trade activity. We also note that the slowdown is likely to continue into 2017, for which we have downgraded our real GDP forecast to 1.7%, versus 2.2% previously.
The HKMA is unlikely to remove its macroprudential measures targeting the residential real estate market despite a significant decline in price levels over recent quarters. With affordability ratios still extremely stretched, both the monetary authority and the government will likely hold out for a deeper price correction before making significant adjustments. Meanwhile, we maintain our forecast for headline inflation to cool to 2.0% by the end of 2016, versus a 2.6% y-o-y print in May.
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.
|BMI/Census and Statistics Department|
|Nominal GDP, USDbn||290.9||308.7||318.6||331.4|
|Real GDP growth, % y-o-y||2.5||2.4||1.2||1.7|
|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||1.3||1.2||1.3|
|Current account balance, % of GDP||1.8||2.9||2.7||1.9|
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