Hong Kong steers a stable economic course amid shifting winds
Anoop Singh says strong fiscal discipline will ensure city remains buoyant
The global economic outlook has shifted course. Overall growth remains moderate, and the dynamic has turned with advanced economies gaining momentum while emerging markets are slowing. Growth in Asia has clearly slowed, with weaker global demand, capital volatility, China's transition to a more moderate growth path and supply constraints in a number of countries. Hong Kong's economy, however, is an exception; it has fared better than most.
With the anticipation of the US Federal Reserve's exit from easy monetary policy, capital flows have reversed in emerging markets, putting pressure on currencies and asset prices. Countries with large current account deficits and high inflation - such as India and Indonesia - were hit harder as markets focused on underlying vulnerabilities in these economies. Nevertheless, financial market stress has been manageable. The absence of large financial imbalances, sizable buffers and strong fundamentals have shielded Asian economies so far from major spillovers from the changing financial market sentiment. Overall, therefore, we still expect Asia to remain a growth leader. Growth of around 5 per cent this year and slightly higher next year is expected to be supported by a rebound of activity in the rest of the world and resilient domestic demand. Emerging Asia should grow well above 6 per cent next year.
Among the near-term risks for Asia, the uncertainty in global funding conditions is a main concern. The prospect of continued slow growth in advanced economies is another. Meanwhile, banks, firms and households in Asia that have rapidly expanded their balance sheets could be vulnerable to changes in sentiment. And, while "Abenomics" has had a strong initial impact in Japan, further progress is needed.
Against this backdrop, Hong Kong's resilience is a reflection of its sound economic institutions and prudent macroeconomic policies. With its linked exchange rate system, it has imported the extraordinary measures taken by the Fed since 2009. Resulting low interest rates, together with tight supply and strong demand, have contributed to sustained upward pressure on housing prices. However, the use of prudential policies has helped safeguard the financial system against risks and, as advanced economies move towards an exit from unusually easy monetary policies, weaker net capital inflows should help abate concerns about rapidly rising credit and asset prices. Nevertheless, market surprises, both in terms of speed and size of tightening, could imply more volatile conditions ahead.
However, experience shows that, with its flexible markets and strong institutions, Hong Kong can weather such conditions and external shocks relatively well. Looking ahead, we project Hong Kong's economy to grow above 3 per cent this year, supported by a strong labour market and robust tourist inflows. Indeed, in the first half of this year, both investment and consumption have held up. Construction activity is likely to moderate but remain healthy as property prices stabilise. Inflation is expected to stay within the 3 to 4 per cent range. Over the medium term, growth is expected to improve to above 4 per cent as the global economy recovers and Hong Kong benefits from development as an offshore financial and trading hub for the mainland.
Of course, as a highly open and globally integrated economy, Hong Kong will continue to be affected by developments abroad. Nevertheless, a proven track record of strong and credible economic institutions, anchored by the linked exchange rate and continued prudent policies, will help Hong Kong weather the uncertainties, shifting winds and even storms on the seas of the world economy.
Anoop Singh is director of the International Monetary Fund's Asia and Pacific Department