HK's economic performance short of expectations

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The Hong Kong economy expanded 5. 1 percent year-on-year in the second quarter this year, much lower than the 7.5-percent growth in the first quarter, and also lower than market expectations of around 6 percent, according to figures released by the city's government on Friday.

On a seasonally adjusted quarter-to-quarter comparison, the Hong Kong economy contracted 0.5 percent in real terms in the second quarter, which was the first quarterly decline in two years, following a 3.1-percent expansion in the first quarter. Market consensus had expected for a 0.4-percent growth quarter-to-quarter.

Acting government economist Andrew Au told a press briefing that the lower-than-expected growth mainly reflected the drag from merchandise trade and a very high base of comparison in the first quarter.

Au said Hong Kong's exports of goods slowed in the second quarter to show virtually little change in real terms over a year ago.

This was partly attributable to the temporary disruptions to regional supply chains after Japan's twin disasters in March this year, and the slower growth in demand in many export markets was also relevant, he said.

After rising 71.3 percent year on year in the first quarter, Hong Kong's merchandise export growth plummeted in the second quarter to minus 37.5 percent. As a result, net merchandise exports shaved 4.6 percentage points off Hong Kong's GDP growth, HSBC's China Economist Donna Kwok said in a research note.

Though a touch softer than expected, the Hong Kong economy still ran hot in the second quarter. Local economy still managed to rebuff the bulk of the slow down with remarkably robust household and business spending, despite sluggish exports, she said.

The Hong Kong economy kicked off 2011 on an even stronger footing than previously thought, offering thicker cushioning still for the bumpier Q2 growth trajectory the HSBC had anticipated, As a result, economic growth stayed remarkably healthy for the first half of this year, she added.

Matthew Circosta, an economist with Moody's Analytics, said the contraction in the second quarter was "almost inevitable" after Hong Kong recorded the strongest growth in exports during the first quarter since records began two decades ago.

Although goods trade failed to grow in the second quarter, Hong Kong's services exports held up well, growing 7.8 percent in real terms over a year earlier. Travel services exports and financial and other business services provided the main impetus, on the back of vibrant inbound tourism and active cross-border financing, fund-raising and other commercial activities.

But the key driver of the city's overall economic growth in the second quarter is domestic demand, according to the government.

Private consumption spending grew 9.2 percent year-on-year, thanks to sanguine consumer sentiment and improving income conditions. Overall investment spending increased 8.1 percent, bolstered by the continued expansion in public building and construction works, and a rebound in private machinery and equipment acquisition.

Looking into the second half this year, Au said the level of uncertainty in the external environment has been increasing since the beginning of the year. The fragile economic recovery, the U.S. fiscal positions and the lingering sovereign debt problem in the eurozone remain the key sources of downside risks to the global economy.

The austerity measures advanced economies are implementing to redress their fiscal weakness may also weigh on their growth momentum in the coming period. Nevertheless, the dampening effects of the Japan incident on regional trade flows are expected to gradually fade, he said.

More importantly, the Asian and emerging market economies as a whole should continue to outperform the advanced economies, and Hong Kong's domestic sector is expected to stay resilient, he said.

Au said Hong Kong's economy is set to be on track to achieve the growth forecast given the strong outturn of a 6.3 percent year-on-year real GDP growth in the first half of this year. The city's government forecast its GDP growth for the entire 2011 would be at 5 to 6 percent.

Kwok agreed.

Though Hong Kong's trade outlook is looking more uncertain, the rebound of demand from Japan will eventually provide the region with a bigger growth boost towards the end of the year than is currently being priced in by markets, she said.

The HSBC expected Hong Kong's economic growth momentum to hold steady in the second half, as the Chinese government brings mainland's inflation under control, supply disruptions in Japan subside, and Japan's reconstruction projects kick off.

"The uncertainty hovering over the U.S.'s and Europe's growth outlooks are a concern, but because Hong Kong's trade reliant sectors are ultimately driven more by the Chinese Mainland and Asian rather than Western demand, we remain comfortable with our full year GDP growth forecast of 6.4 percent," she said in the note.

Moody's Circosta also struck a positive tone on the outlook for Hong Kong

"Its close integration with the mainland, increased port throughput, continued buoyancy in the property market, and strong private consumption continue to support a growth dynamic that should see it through the vagaries of the current financial market volatility," he said.

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