Hong Kong economy slows as stocks climb, property booms

Stark contrast as government cuts its growth target after drop in tourist spending - yet HSI breaks 25,000 and property hits historic peak

PUBLISHED : Friday, 15 August, 2014, 6:20pm
UPDATED : Saturday, 16 August, 2014, 8:28am

The Hong Kong government cut its growth target for the year yesterday after a disappointing second-quarter performance as stock and property market indicators reached new heights.

Real gross domestic product increased by 1.8 per cent year-on-year, down from 2.6 per cent in the first quarter and lower than the market-expected 2.4 per cent. On a quarter-to-quarter basis, real GDP dipped by 0.1 per cent.

The poor performance, caused by a drop in tourist spending and weak domestic demand, prompted the government to lower its full-year forecast from a range of 3 to 4 per cent, to between 2 and 3 per cent.

It was the slowest growth since the third quarter of 2012. The economy expanded 2.9 per cent last year.

The grim outlook was in stark contrast to the frenzy in the stock and property markets. The Hang Seng Index yesterday broke the 25,000 barrier for the first time since May 2008, before closing at 24,954.94 - the highest since November 8, 2010.

An index compiled by Centaline Property reflecting private residential property prices reached a peak of 125.66, an increase from last week. The index was 100 in October 1997.

While the "through train" plan to allow mainland people to trade directly in Hong Kong stocks starting in October has fuelled the market, the government has reminded investors of potential abrupt reversals of cross-border fund flows due to uncertainties over interest rates.

The Federal Reserve in the United States plans to stop buying Treasury bonds and mortgage-backed assets in October, signalling its confidence in economic growth without its support. But it remains unknown when it will take the more drastic step of increasing interest rates.

"We may see significant changes in market expectation … and there may be greater volatility," government economist Helen Chan said.

Visitor spending dropped 11.5 per cent from the same quarter last year, offsetting the improvement brought by increasing exports. Chan said that as the number of visitors increased by almost one-fifth from the same period last year, the fall pointed to each visitor spending less.

Their waning interest, adding to an exceptional high base of comparison last year due to a gold rush, caused sales of luxury goods in the second quarter to fall by a third year-on-year. The economy is expected to see modest growth by the end of the year.

A sales tax increase took a toll on Japan's economy, which saw the biggest contraction in the second quarter since the 2011 earthquake. The euro zone was flat after a year of weak growth as Germany reported a shock GDP dip of 0.2 per cent.