Hong Kong’s y/y GDP growth turned positive in Q1 for the first time since Q2 2019. Even after accounting for base effects, the economy expanded impressively thanks to the strength of exports. With the virus situation under control, we think the recovery will continue to gain momentum over the coming quarters.
External tailwinds continue to boost recovery
- Hong Kong’s y/y GDP growth turned positive in Q1 for the first time since Q2 2019. Even after accounting for base effects, the economy expanded impressively thanks to the strength of exports. With the virus situation under control, we think the recovery will continue to gain momentum over the coming quarters.
- After dropping back in Q4, GDP growth rose from an upwardly revised 0.5% in Q4 to a record 5.3% last quarter in seasonally adjusted q/q terms. And year-on-year growth far exceeded expectations, jumping from -2.8% to +7.8% (the Bloomberg median was +3.7%, our forecast was +2.3%). (See Chart 1.)
- The breakdown of the GDP data shows that the stronger-than-expected improvement was due in large part to the continued strength of the exports sector. Growth in goods exports soared from 5.5% y/y in Q4 to 30.6% last quarter. It rose a solid 12.2% in seasonally-adjusted q/q terms, with the authorities pinning much of the strength on “the global economic recovery led by the Mainland and the US”.
- The recovery in private consumption, which accounts for around two-thirds of the city’s demand, was more modest, expanding by 1.6% q/q. This was mostly due to the latest round of containment measures which lasted for most of Q1. Together with a low base for comparison, y/y growth turned positive for the first time since Q2 2019, rising to +1.6% from a decline of 6.9% in Q4. The rest of the economy, which was not directly affected by the new containment measures, continued to gain ground. Investment growth rose from 3.6% y/y to 4.5%, while growth in government spending remained supportive, edging up from 6.1% y/y to 6.7%.
- The near-term outlook continues to brighten now that the latest outbreak has been largely contained and restrictions are being eased. What’s more, vaccination rates have picked up in recent weeks. If the virus situation remains under control, consumption will almost certainly be stronger this quarter than last.
- Mobility data are near normal levels again, which suggests that consumer activity has started to recover. (See Chart 2.) That said, the retail sector will remain a lingering weak spot until mainland shoppers return. GDP in Q1 was just 1.5% below the pre-protest peak in Q1 2019 while retail sales remain around 30% below pre-protest levels. A full recovery in Hong Kong will therefore hinge on the reopening of borders to mainland visitors. So far, there is still no word on when this might happen – we assume it will happen by Q4 this year.
- In light of the much stronger-than-expected data for Q1, growth this year is highly likely to exceed the 5.0% we are currently forecasting. As a result, we will be revising our forecast in the coming days. The consensus before today’s release was for 2021 growth of 4.2%.
Chart 1: Hong Kong GDP Growth
Chart 2: CE Hong Kong COVID Mobility Tracker
Source: CEIC, Capital Economics
Sources: CEIC, Refinitiv, Capital Economics
Sheana Yue, Assistant Economist, firstname.lastname@example.org