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HKU Announces 2010 Q1 HK Macroeconomic Forecast

11 Jan 2010

Tepid Economic Recovery
The APEC Studies Programme of the Hong Kong Institute of Economics and Business Strategy at the University of Hong Kong (HKU) released its quarterly Hong Kong Macroeconomic Forecast today (Jan 11).  According to its High Frequency Macroeconomic Forecast, real GDP in 09Q4 is estimated to increase by 0.8% when compared with the same period last year.  This estimate is a slight downward adjustment from the previous forecast of a 1.0% growth released on October 7, 2009 mainly reflecting a slowdown in inventory restocking.  In the current quarter, real GDP growth is forecast to rise by 5.0% when compared with the same period last year.  This strong rebound is from a very weak first quarter last year, and should not be interpreted as a sign of robust growth, but rather as further evidence for the tepid economic recovery started in the second half of last year. 

Professor Richard Wong Yue-Chim, Professor of Economics at HKU said that, "The Hong Kong economy has started to recover and reverted to annual growth in the fourth quarter of 2009.  The recovery is expected to continue.  Hong Kong's real GDP is estimated to contract by 0.8% in the second half of 2009, which is a marked improvement from the 5.7% drop in the first half of 2009.  For the year as a whole, real GDP is estimated to decrease by 3.2% in 2009.  This drop in our real GDP is primarily accounted for by a sharp fall in the external demand of goods and services. The external sector accounted for 3.1 percentage point of the 3.2% drop in real GDP last year, with domestic demand accounting for the rest of the decrease."

"The unemployment rate is forecast to improve slightly in the current quarter, with the rate projected to drop to 5.0% from the estimated 5.1% in the last quarter.  Improving job markets and vibrant asset markets underpin strong consumer confidence.  It is estimated that private consumption spending will contribute 2.6 percentage points to the overall 5.0% GDP growth in the current quarter, thus accounting for more than half of the total growth.  Investment is expected to be vibrant because of infrastructure investment.  The composite CPI has been falling by 0.3% y-o-y for five consecutive months since July 2009. This mild deflationary trend will be arrested by the economic recovery. Prices of consumer goods are forecast to increase, with the headline inflation estimated to be 0.7% in the current quarter," according to Dr. Alan Siu, Executive Director of the Hong Kong Institution of Economics and Business Strategy at HKU.

The forecast details are in Table 1, Table 2, and Table 3 (selected mont hly indicators) of the full report at: http://www.hiebs.hku.hk/apec/macroforecast.htm.

All growth rates reported are on a year-on-year basis.

Forecast Highlights

• Private consumption spending rose by 0.2% in 09Q3, improving from the 1.1% drop in 09Q2. The economic recovery stopped the contraction in consumption spending brought on by the financial tsunami since 08Q4. Continuous improvement is expected in the upcoming quarters. Private consumption expenditure is estimated to grow by 3.7% in 09Q4. Taking into account of the drop in the first half of 2009, private consumption still contracted by 0.8% for the whole of last year. Underpinned by improving job markets and vibrant asset markets, private consumption spending is forecast to gain greater momentum with a 4.2% growth in 10Q1.
• The volume of retail sales increased by 9.8% in November 2009, keeping up with the strong growth of 8.2% in the October 2009. Given the rebound in private consumption and increase in visitor arrivals, the growth in volume of retail sales is estimated to be 8.0% in 09Q4 and 10.4% in 10Q1. For 2009 as a whole, it is projected to fall by 1.3%.
• Total exports of goods shrank by 13.2% in real terms in 09Q3 which is slightly worse than the 12.4% drop in 09Q2. External demand has been picking up due to global economy recovery and inventory rebuilding. The robust growth in the Mainland has also helped to ease the drop in external trade, with re-exports to the Mainland went up by 9.8% in November 2009. Mainland took in around 50% of Hong Kong's re-exports last year. The total exports of goods in real terms is estimated to fall by 0.8% in 09Q4, and is forecast to revert to growth by 10.8% in the current quarter. For the year of 2009 as a whole, total exports is estimated to drop by 12.1%.
• Imports of goods dropped by 8.3% in 09Q3 which is smaller than the 12.7% fall in 09Q2. In November 2009, food, fuels and chemical related products all registered double digit growth of 12.9%, 13.0% and 11.5% respectively. Machinery and transport contributed the most of the increase, accounting for 5.3 percentage point out of the total 6.5% growth in nominal imports in November 2009. Concomitant with the turnaround increase in the exports of goods, the imports of goods is forecast to increase by 3.0% and 13.4% in 09Q4 and 10Q1 respectively. For the year of 2009 as a whole, it is estimated to decrease by 9.7%.
• Service exports fell by 0.9% in 09Q3. The revival in visible trade led to a pickup in the trade related services. The 7.6% rise in visitor arrivals in November 2009 boosted travel related services. The influx of Mainland visitors was the main driver in the growth of visitor arrivals, accounting for 7.5 percentage points of the 7.6% overall growth. The increase in service exports is forecast to be 3.3% in 09Q4 and accelerate to 6.4% 10Q1. The annual decline of 2009 is estimated to be 2.2%.
• Service imports contracted by 3.8% in 09Q3. Service imports is forecast to grow by 0.9% and 1.9% in 09Q4 and 10Q1 respectively. It is estimated to fall by 4.5% in the whole year of 2009.
• Gross fixed capital formation increased by 1.4% in 09Q3, turning around from the 13.6% drop in 09Q2. Given the lower base of comparison, gross investment is projected to grow by 11.0% in 09Q4. Given the economic recovery, the pace of investment spending is expected to pick up and forecast to grow by 14.1% in the current quarter when compared to the same period last year. The annual decline of 2009 is estimated to be 4.3%.
• Investment in land and construction went up by 10.7% in 09Q3, reverting from the 7.3% decline in 09Q2. It is projected to increase by 9.7% in 09Q4 and by 15.3% in 10Q1. The growth momentum is expected to be boosted by the commencement of the HK-Zhuhai-Macao bridge project in 2010.
• Investment spending in machinery, equipment and computer software dropped by 4.0% in the 09Q3, and is forecast to surge by 12.0% in 09Q4. Given the continued economic recovery, investment in machinery, equipment and computer software is projected to increase by 13.1% in the current quarter when compared with the same period last year.

• The general price level, as measured by the Composite CPI, rose by 0.5% in November 2009. The pickup in domestic demand turned the mild deflation around with the headline consumer inflation rate forecast to 1.1% in 09Q4, reverting from the fall of 0.9% in 09Q3. For the year of 2009 as a whole, consumer inflation is estimated to 0.5%. Inflationary pressure is building up along with the ongoing economy recovery and the ending of the rates concession in 10Q2. In the current quarter, headline consumer inflation rate is forecast to be 0.7%.

• The provisional seasonally adjusted unemployment rate improved from 5.1% in the 3 months ending in Nov 2009 from 5.2% in the 3 months ending in October 2009. In the second half of 2009, unemployment in the construction sector experienced a significant improvement with the unemployment rate dropping from 11.8% in June 2009 to 7.6% in November 2009. This improvement is expected to continue with the commencement of infrastructural projects. The overall labour market is expected to improve slowly in 2010, with the unemployment rate forecast to be 5.1% in 09Q4 and further improve to 5.0% in the current quarter. The number of jobless workers is estimated to fall by 3,000 to 186,000 persons in 10Q1 when compared with 09Q4. The number of jobs is forecast to increase by 12,000 in the current quarter, bringing the labour force to the all time high of 3.7 million workers. For the year of 2009 as a whole, the unemployment rate is estimated to average out to be 5.3%.

Concluding Remarks

The Hong Kong economy has weathered the Great Recession falling by 3.2% last year. This decrease is much less than the sharp fall of 6.0% in 1998 due to Asian Financial Crisis.  The economic recovery started in the second half of last year is expected to continue, though the pace of recovery is quite tepid because the external export demand is still weak.  For the current year, conditional on continued recovery of the global economy, real GDP is forecast to increase by 4 to 5 percent, with consumer inflation rate picking up to 2% and unemployment dropping to 4.5% by year-end.

About Hong Kong Macroeconomic Forecast Project

The Hong Kong Macroeconomic Forecast is based on research conducted by the APEC Studies Programme of the Hong Kong Institute of Economics and Business Strategy at HKU in the Faculty of Business and Economics.  It aims to provide the community with timely information useful for tracking the short-term fluctuations of the economy.  The current quarter marco forecasts have been released on a quarterly basis since 1999.

The high frequency forecasting system was originally developed in collaboration with Professor Lawrence Klein of the University of Pennsylvania in 1999-2000.  Since then, the system has been maintained and further refined by the APEC Study Center which is now a research programme area of the Hong Kong Institution of Economics and Business Strategy.

The project is sponsored by the Faculty of Business and Economics.  The Hong Kong Centre for Economic Research at HKU provides administrative support to the project.  Researchers at the Hong Kong Institution of Economics and Business Strategy are solely responsible for the accuracy and interpretation of the forecasts. Our quarterly forecasts can be accessed at:

http://www.hiebs.hku.hk/apec/macroforecast.htm

For media enquiries, please contact Ms Trinni Choy, Assistant Director (Media) (Tel: 2859 2606/Email: pychoy@hku.hk ), or Ms Melanie Wan, Manager (Media) (Tel: 2859 2600/Email: melwkwan@hku.hk ), Communications & Public Affairs Office, HKU.