Strong Q4-2016 GDP performance was led by household spending and investment, recovering tourism
We raise our 2017 GDP forecast to 2.2%; external headwinds and weak sentiment likely to cap upside
Fiscal windfall allows for one-off concessions that are likely to support the modest recovery
Q4-2016 GDP points to stabilisation this year
The Hong Kong economy ended 2016 on a high note after a rough start to the year. Headline growth was 3.1% y/y in Q4-2016, materially stronger than the consensus expectation and the Q3 reading (both 2.0%). The q/q growth rate also improved to 1.2% from Q3’s 0.8%, beating the market’s 0.7% expectation. The Q4 GDP report reinforced the themes that domestic drivers are finally pulling their weight and that the economy has probably bottomed out.
Private consumption expenditure (PCE) was the clear driver of y/y growth in Q4, contributing 2.1ppt of the 3.1% total, up from 0.8ppt in Q3; this followed four straight quarters of decline in the PCE contribution (Figure 1). Investment added another 1.1ppt to growth, almost matching Q3’s 1.4ppt, boosted by a favourable base effect and a stabilising China. Services exports also contributed positively for the first time in five quarters, fully offsetting the drag from services imports. Net goods exports were the main negative in Q4, but this largely reflected higher imports due to rising domestic demand; goods export growth actually improved to 5.1% y/y from 2.4% prior, matching monthly data trends.
The stabilisation in household (and tourist) spending and investment proved more solid than we originally expected. Stronger-than-expected growth momentum in Q4-2016 may carry over into 2017; this prompts us to revise up our full-year GDP growth forecast to 2.2% from 1.8%, although global economic and geopolitical headwinds remain. Our Hong Kong SME Leading Business Index (SME Index) shows lingering pessimism across economic sectors, which is likely to limit the scope of the recovery. We welcome the government’s latest counter-cyclical fiscal concessions, especially given the sizeable fiscal windfall from land sales and stamp duty.