Hong Kong: Speedy recovery


Hong Kong’s real GDP held up at 7.5% YoY in 2Q21 from 8.0% in the previous quarter.
Samuel Tse02 Aug 2021
  • Real GDP grew by 7.5% YoY in 2Q21 from 8.0% in the previous quarter
  • We expect the city to reach herd immunity by the end of this year
  • We have revised up our 2022 GDP forecast to 3.0% from 2.3% on the assumption…
  • … that China re-opens its borders early next year
  • Property prices might exceed our 7.5% growth forecast in 2021
Photo credit: AFP Photo


Headline growth still high

Hong Kong’s real GDP held up at 7.5% YoY in 2Q21 from 8.0% in the previous quarter. On a seasonally adjusted QoQ basis, it fell by 1.0% mainly reflecting some slowdown in exports of goods from the exceptionally strong growth in 1Q. We have revised up our 2022 GDP forecast to 3.0% from 2.3% on the assumption that China re-opens its borders early next year.

Consumption stabilizing

Private consumption growth improved further from 2.1% YoY in 1Q to 6.5% in 2Q. Retail sales rose by 10.4% in May. Discretionary spending such as jewelry witnessed more appreciable growth of 55.1%, a sign of buoyant local consumption sentiment. CPI stayed positive at 0.7% in June; clothing saw the most apparent acceleration of 3.2%. Vaccination progress picked up after corporates provided incentives e.g. lucky draws for properties. To date, over 30% of the population are fully vaccinated. We expect the city to reach herd immunity by the end of this year. Looking ahead, more relaxation in local social distancing rules should boost the recovery. The issuance of HKD5000 worth of cash vouchers, equivalent to HKD36bn or 11% of the 2020 retail sales value, should boost the spending power ahead. The seasonally adjusted unemployment rate fell from an 18 year-high of 7.2% in Dec20-Feb21 to 5.5% in 2Q. That of the retail, accommodation and food services sector dropped from 11.1% to 8.5%. The overall jobless rate is forecast to drop from the current level to 4.8% in 4Q.

Exports growth remained strong

Exports of goods rose by 20.3% YoY in 1Q and 33.0% in June. Outward shipment to the Mainland China soared by 36.6% in June amid its fully recovered domestic economy. Although China’s export-led industrial activities are likely to moderate in the months ahead (see “China: Slower headline growth; policy in neutral gear”), those to the advanced economies such as US, Germany, and Netherland should improve further amid a recovering global economy (US 2Q GDP: 6.5% QoQ). The ongoing global vaccination progress will support Hong Kong’s re-exports down the road.

Fiscal deficit to narrow

Against this backdrop, the government is likely to hold back further fiscal stimulus. Fiscal balance is expected to remain in deficit at 3.6% of GDP in FY21/22 from 9.4% in the previous year. Government spending growth eased from 7.0% in 1Q21 to 2.9% in 2Q. Fiscal reserves stabilized at HKD907bn in May, 7.1% higher than the lowest reading amid COVID in Oct 20. As the government has already front-loaded the i-bond (retail government bond) issuance in June, the government bond issuance is expected to slow in the months ahead.

Investment will be supported by the ultra-low short-end rates

Gross fixed capital formation growth accelerated to 23.7% YoY in 2Q from 4.8% in 1Q, alongside the recovering economic condition as well as the ultra-low interest rate environment. Based on the last US tapering cycle in 2014-15, HIBORs will remain anchored before an actual US rate hike (likely to happen in 2023) (see “HKD Rates - HIBORs to remain anchored”). Liquidity stayed flush. Aggregate Balance, stayed at HKD457bn, compared to the pre-COVID period of HKD54bn. Even the stock market was volatile amid the regulatory storm of Chinese tech and education listed companies, 1-M HIBOR hovered at zero-bound of 0.073%-0.088% last week, with the spread against its LIBOR counterpart largely neutral. Overnight HIBOR, an indicator of market volatility, also stayed anchored at 0.046% or 3bps below LIBOR. If market sentiment continues to improve, capital inflow will return soon. The upcoming Greater Bay Area Wealth Connect, with the initial quota at RMB150bn for both Northbound and Southbound routes, will add fresh liquidity to the Hong Kong banking system.

Luxury property prices to play catch up

Residential property prices in the secondary market rose by 7.1% YTD and was only 0.9% below its historical high in June 2019. This was attributed to pent-up demand from a more stable COVID situation. The number of transactions soared by 21.3% QoQ. Among all, the price and transactions of the luxurious market / large units will continue to see more appreciable catch-up as border against Mainland China is in-sight. Looking ahead, the demand-supply imbalance will continue to support home prices. According government’s projection, the medium-term (3-4 years) primary market supply increased by only 3,000 units QoQ to 96,000 units. Land sales stagnated somewhat. There will be 18,230 units under construction to be completed this year. Yet, over 70% of these have been already sold. There is upside risk to our 2021 property price forecast of 7.5% growth.


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Samuel Tse 謝家曦

Economist - China & Hong Kong 經濟學家 - 中國及香港
[email protected]


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