Hong Kong Cuts 2014 Growth Forecast After Unexpected Contraction

Hong Kong cut its economic growth forecast for the year after an unexpected contraction in the second quarter as a slowdown in China crimped the purchases of luxury items and weighed on local sentiment.

The economy is forecast to expand 2 percent to 3 percent, the government said in a statement yesterday, compared with its February prediction of 3 percent to 4 percent. Gross domestic product fell 0.1 percent in the second quarter from the prior three months, missing the median estimate of 10 analysts surveyed by Bloomberg News for 0.4 percent growth.

Retail sales in Hong Kong have dropped for five straight months through June as China’s economic growth moderated and the country’s anti-corruption campaign trimmed tourists’ spending on luxury items. Business investment and consumption have dropped, while unemployment rose, Financial Secretary John Tsang wrote on his government blog on Aug. 10.

“The weak performance was mainly weighed down by a fall-off in tourist spending and a concurrent slowdown in domestic demand,” Helen Chan, the government economist, said in a statement. “Both the local and external environments are beset with increasing downside risks.”

The economy expanded 1.8 percent in the second quarter from a year earlier, weaker than the revised 2.6 percent expansion in January through March and missing the 2.5 percent pace expected by economists.

Political Unrest

A moderate recovery in the global economy and an improving mainland economy “should entail a somewhat brighter export outlook for Hong Kong in the period ahead,” Chan said. “On the local front, domestic demand is likely to maintain only a rather slow pace of expansion in the second half of the year.”

Slowing economic growth and rising unemployment in Hong Kong may stoke more unrest in the city, which is grappling with a debate over how to pick its next leader in 2017. The city saw its biggest political rally in a decade on July 1, the anniversary of its return to China, as protesters demanded full democracy.

The lack of political stability in such an environment may lead to a “perfect financial storm,” Tsang wrote in his blog. “We must keep an eye on risk factors in Hong Kong and overseas. We can’t lower our guard.”

LVMH Moet Hennessy Louis Vuitton SA, the world’s largest luxury-goods company, said last month that business in the city has slowed markedly. Part of the slowdown was linked to “political unrest” in the city, the company said.

Retail sales in June fell 6.9 percent from a year ago, with spending on jewelry and watches down 28.2 percent, the government said July 31. Hong Kong is feeling the effects of moderating growth in China, where credit expansion in July fell to its lowest since the global financial crisis, property sales declined and industrial output expansion slowed.

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