Shaky global economy clouds Hong Kong outlook

PUBLISHED : Friday, 11 May, 2012, 12:00am
UPDATED : Friday, 11 May, 2012, 12:00am


We at the IMF have become more cautiously optimistic in our outlook for global growth over the past few months. A string of encouraging economic indicators have emerged from the United States, and better policies in response to the euro area's deepening crisis have helped reduce the threat of a sharp global slowdown. A weak recovery will probably resume in the major advanced economies, and activity is expected to remain relatively solid in most emerging and developing economies.

Asia as a whole continues to outperform. The region should grow by 6per cent this year, compared with 3.5per cent for the global economy.

This is not to say it's all good news from now on. Downside risks remain elevated and relate mainly to the external environment. The debt crisis in the euro area has not been fully resolved, financial turmoil could still escalate, and rising geopolitical risks could push energy prices sharply higher. In sum, the recent improvements are fragile, and many important policy challenges remain to be addressed.

Naturally, growth prospects are considerably weaker for the more open and trade-dependent economies like Hong Kong, especially in the first half of this year. We expect the Hong Kong economy to pick up the pace in the second half of the year and expand by 2.6per cent in 2012.

Growth will be fuelled by domestic consumption and investment. Though it will not match last year's stellar performance, private consumption looks set to be the main driver, helped by the economy's resilient labour market, loose global financial conditions and favourable prospects on the mainland.

The Hong Kong government's sizeable spending plan unveiled in February - appropriately targeting education, health care, social welfare, housing and infrastructure - should also support domestic demand. In addition, we continue to expect a gradual return to price stability as inflation in Hong Kong edges down to average around 3 3/4 per cent for the year.

Hong Kong banks have preserved the high quality of their loan portfolios. Despite a credit boom over the past two years, their liquidity profiles remain sound, and capital positions are well above international standards. The city remains the world's top market for initial public offerings, with increasing participation from mainland firms.

Looking ahead, credit growth is likely to moderate as underlying loan demand is constrained by weaker trade performance and conservative prudential standards for the housing market.

The principal near-term risk to growth remains rooted in the fragile global recovery. In our worst-case estimates, Hong Kong's economy might not grow at all this year.

After a period of relative calm, leading indicators of house prices and mortgage loan-to-value ratios in Hong Kong have again picked up. At this juncture, the high uncertainty surrounding the global outlook, Hong Kong's robust prudential policy framework, and the government's existing land-sale strategy should help contain near-term market briskness. Nevertheless, if global economic and financial conditions stabilise further, overheating pressures could revive.

With sound macroeconomic fundamentals, robust regulatory, supervisory and financial infrastructures and a strong legal system, investors will continue to regard Hong Kong as the main financial services portal between mainland China and the rest of the world.

The key policy challenge will continue to be the high cost of housing, which places a large burden on renters and new households that do not yet own a property. It is appropriate, therefore, that the government has been working to ease this burden by increasing the availability of land and public housing. This challenge, I am confident, will continue to occupy the minds of policymakers into the medium term.

Anoop Singh is director of the IMF's Asia and Pacific department