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Professor Richard Wong Yue-Chim, Professor of Economics at HKU said that, "The harsh winter dampened the US economy more than expected in the first quarter of 2014.  The deeper-than-expected slump in the US economy translated into a sluggish growth of Hong Kong's external demand in the first quarter of 2014.  Nevertheless, we expect the rather strong domestic demand continues to drive the real GDP growth in the current quarter.  Domestic demand is expected to contribute for 2.6 percentage points of growth.  The external demand, as measured by the net exports of goods and services, is forecast to contribute only 0.8 percentage points.  In aggregate, Hong Kong GDP is forecast to grow by 3.4% in the current quarter.”

"The labour market is projected to remain relatively stable with the unemployment rate projected to be flat at 3.2% in 14Q3 as compared to 14Q2.  Inflation is expected to be stable in the near term.  The headline consumer inflation rate is forecast to 4.0% in the third quarter, up from the estimated 3.7% in the second quarter in 2014," according to Dr. Ka-fu Wong, Principal Lecturer of Economics at HKU.

The forecast details are in Table 1 and Table 2, and the forecasts of selected monthly indicators are in Table 3.  All growth rates reported are on a year-on-year basis.

Forecast Highlights

• Private consumption spending grew by 2.0% in 14Q1, a slowdown from the 3.6% growth in 13Q4.  This slowdown is partly due to a higher base of comparison a year earlier.  Given stable job market, private consumption spending is projected to grow in a slightly faster pace at 3.0% in 14Q3, an acceleration from the forecast of 2.2% in 14Q2.

• The volume of retail sales dropped by 9.5% in April 2014.  Jewellery category retail sales volume dropped by 37.7%, while food, clothing and other consumer goods recorded 1.9%, 9.6% and 3.4% growth respectively.  This decline in retail sales reflected the change in visitor’s consumption pattern and a higher base of comparison. Thus, we expect that drop in retail sales will be temporary.  We expect the volume of retail sales in 14Q2 to drop by 4.6%, and that in 14Q3 to grow by 2.4%.

• Total exports of goods rose by 0.5% in 14Q1, reflecting the impact of the US harsh winter in 14Q1.  In May 2014, Hong Kong’s nominal external merchandise exports exhibited a 4.9% growth, reverting from the 1.7% drop in April 2014.  Foreign inventory restocking is expected to support the total exports of goods.  Total exports of goods are estimated to grow by 2.5% in 14Q2 and are forecast to accelerate to grow by 3.3% in 14Q3.

• Imports of goods grew only by 1.2% in 14Q1, much lower than the 6.1% growth in 13Q4.  In May 2014, the nominal imports grew by 3.7%, accelerated from the 2.4% growth in April 2014.  We expect the growth of imports of goods to resume.  It is forecast to grow by 2.6% in 14Q2 and 3.5% in 14Q3.

• Service exports grew by 3.1% in 14Q1, decelerating from the 4.7% growth in 13Q4.  Growth in visitor arrivals held up well at 10.9% in April 2014.  The influx of Mainland visitors is expected to fuel travel related services continuously in the near term.  Thus, the service exports are forecast to pick up and grew by 4.4% in 14Q2 and 5.0% in 14Q3.

• Service imports fell by 0.2% in 14Q1, reverting the 5.5% growth in 13Q4.  Service imports are forecast to grow by 2.6% and 2.8% in 14Q2 and 14Q3 respectively.

• Gross fixed capital formation rose by 3.0% in 14Q1, slowed from the 5.3% growth in 13Q4.  Slack of infrastructural projects commencement is expected to dampen the growth in investment spending.  The gross fixed capital formation is projected to fall by 1.4% in 14Q2 and 0.4% in 14Q3.

• Investment in land and construction grew by 4.5% in 14Q1, reverting the 8.6% drop in 13Q4.  The investment in land and construction is projected to fall by 0.1% and 1.9% in 14Q2 and 14Q3 respectively.

• Investment spending in machinery, equipment and computer software grew only by 1.4% in the 14Q1, which is a noticeable slowdown as compared to the 17.5% surge in 13Q4.  The investment in machinery, equipment and computer software is projected to drop by 2.3% in 14Q2 and grow at 0.7% in 14Q3.  The deficient growth performance in recent quarters is partly due to a higher base of comparison a year earlier.

• The general price level, as measured by the Composite CPI, rose by 3.7% in May 2014.  Inflationary pressure is expected to remain relatively stable in the near term.  The headline consumer inflation rate is forecast to be 3.7% in 14Q2 and 4.0% in 14Q3.  The acceleration in 14Q3 is mainly due to the end of electricity subsidy in June 2014.  If we take out this factor, the underlying inflation rate is estimated to be 3.3% in 14Q3.  

• The provisional seasonally adjusted unemployment rate improved slightly to 3.1% in the 3 months ending in May 2014 from the 3.2% in the 3 months ending in April 2014.  We expect a stable labour market and steady wage growth.  The unemployment rate is expected to be jittering at around current full employment level in upcoming quarters.  It is forecast to be 3.2% in both 14Q2 and 14Q3.  The labour force is estimated reaching 3.9 million persons, with 7000 job creation in current quarter compared to the last quarter.

Concluding Remarks

We lower our forecast of annual growth of real GDP to 3.1% in 2014, as opposed to the 3.5% announced earlier.  This revision reflects the unexpected larger impact of the harsh winter in the US which slapped its economy to shrink by an annualize rate of 2.9% in the first quarter of 2014.  Nevertheless, the setback in the US recovery is likely temporary.  It seems that EU recovery remains on track, China’s economic performance remains in check, and the lower interest rate environment will continue for a while.  Much uncertainty in the external sectors remains. Taken together, we remain cautiously optimistic about the economic conditions of Hong Kong

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 macro 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

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