Hong Kong Growth Trails Estimates as City Cuts Outlook

Hong Kong Growth Trails Estimates as City Cuts 2012 Outlook
Store signs are reflected on the side of escalators at Times Square shopping mall in the Causeway Bay district of Hong Kong. Photographer: Jerome Favre/Bloomberg

Hong Kong’s economy expanded less than estimated in the third quarter as export gains stalled and retail sales rose at a slower pace. The government also cut its forecast for full year growth.

Gross domestic product rose 1.3 percent from a year earlier in the third quarter, the government said today. That compared with the 1.7 percent median forecast in a Bloomberg News survey of 16 analysts and 1.2 percent in the three months through June. The economy grew 0.6 percent from the previous quarter on a seasonally adjusted basis.

Hong Kong’s economy is set for its weakest annual expansion since the global financial crisis, adding to challenges for Hong Kong’s new Chief Executive Leung Chun-ying as he grapples with capital inflows that are stoking property prices and testing the local currency’s peg to the U.S. dollar. Financial Secretary John Tsang said on Nov. 11 that the trade-reliant economy may enter recession if its major partners show a loss of growth momentum or signs of contraction.

“The biggest drag on Hong Kong’s economy is external trade,” said Lily Lo, a Hong Kong-based economist at DBS Group Holdings Ltd. “There is as yet no clear data or evidence pointing to a sharp rebound in key western export markets.”

Lo said she is maintaining her full-year forecast for the city’s expansion at 1.5 percent. “The risk of recession is muted as fourth-quarter growth is expected to pick up modestly on the back of a rebound in China’s growth.”

Lower Growth

The benchmark Hang Seng Index has climbed about 15 percent this year, as monetary loosening in developed economies attracted capital betting on a recovery in China’s growth. The gauge gained 0.2 percent today.

The government today lowered its estimate for full-year growth to 1.2 percent from an August projection of a range of 1 percent to 2 percent. That would be the slowest pace since 2009 when the economy contracted 2.6 percent. GDP increased 5 percent last year and 7.1 percent in 2010.

The new growth estimate “is a prudent forecast,” Helen Chan, the government’s economist, said at a briefing today. “We are confident we can achieve that.”

At the same time, she said that after four quarters of “subdued growth, the pressure on the labor market has begun to emerge.”

The government also today raised its forecast for the city’s full-year inflation rate to 3.9 percent from 3.7 percent, citing higher global food prices, the impact of quantitative easing in advanced economies and a renewed pickup in housing rental costs.

Downside Risks

The city’s exports increased 15.2 percent in September from a year earlier, rebounding from a 0.6 percent increase in August and a drop the previous month. The gain was helped by an improvement in demand from China and the U.S. and what the government described as a “distinctly low base of comparison” in the same month last year.

At the same time, the “global economic environment is still fraught with downside risks stemming from the euro debt crisis and looming U.S. fiscal cliff,” a government spokesman said in a statement when the data were released on Oct. 25. He was referring to the $607 billion in U.S. federal spending cuts and tax increases scheduled to take effect in January unless the nation’s legislature acts.

Financial Secretary Tsang also warned of the risks to Hong Kong’s economy from a slowdown in external demand in comments on his blog on Nov. 11.

Record Price

Tsang this week rejected calls from lawmakers to review the city’s 29-year-old peg to the U.S. dollar amid rising concern that asset prices are being driven to unsustainable levels by record-low borrowing costs and capital inflows.

Swire Properties Ltd., the Hong Kong landlord whose tenants including Time Warner Inc., sold a Hong Kong apartment in a building designed by Frank Gehry for a record square-foot price of HK$68,083 ($8,783), the company said in an emailed statement on Nov. 13.

The exchange-rate system ties the city’s monetary policy to that of the U.S., where the Federal Reserve is using near-zero interest rates to support an economic recovery. Funds are flowing into Hong Kong after the U.S., Europe and Japan introduced policies to stimulate their economies.

The Hong Kong Monetary Authority, the city’s de-facto central bank, has bought a combined $4.2 billion of the U.S. currency since it began defending the upper limit of the peg for the first time in three years on Oct. 19 in New York trading. The HKMA has acted 10 times, with the latest move on Nov. 2.

Overheated Market

“The dilemma of having a sluggish economy and an overheated property market is unavoidable under the peg system, particularly under such extensive quantitative easing measures by the Fed,” Kevin Lai, a Hong Kong-based economist at Daiwa Capital Markets Hong Kong Ltd., said before the data release. “That means Hong Kong’s going to end up with either a boom-or-bust scenario.”

Interest rates close to record lows and an influx of Chinese money have helped double Hong Kong apartment prices in the last four years.

The government imposed a tax on overseas homebuyers last month to deter capital inflows and reduce the risk of a housing bubble. The move followed a tightening of mortgage requirements and an increase in the supply of land for developers.

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