- HK economy registered a technical rebound of 3.2% in 2023 after a 3.5% contraction in 2022.
- Private consumption and investment were core drivers.
- Quarterly growth rising from 4.1% YoY in 3Q to 4.3% in 4Q.
- Elevated interest rates restrained consumption, inbound tourism, external demand, and investment.
- Implication for the forecast: We expect Hong Kong GDP to grow modestly by 2.0% in 2024.
Elevated interest rates restrained domestic consumption, inbound tourism, external demand, and investment. The recovery ahead will remain modest based on our in-house projection for the Fed to cut rates by 100bps in 2H24. 1M and 3M-HIBORs are likely to stay above 4% this year. Furthermore, a softening Mainland growth momentum is expected to drag Hong Kong’s economic performance.
Private consumption rose by 3.5% YoY in 4Q, down from 6.2% in 3Q. The negative wealth effect from weak asset markets curbed spending power. The Hang Seng Index plummeted 32.3% from its peak in Jan 2023. Residential property prices consolidated by 6.1% in the year 2023, returning to the level last seen in 2017. We expect another 5% correction in 1H24 before the interest rate cut.
The retail sector was hit by declining Mainland tourist spending. In Dec 2023, Mainland tourist arrivals were only 2.9 million, marking a 43% decrease from 2018’s average. Daily spending by Chinese tourists also saw substantial reductions, with a 14% decrease for overnight visitors and 48% decrease for day-trippers compared to 2018 levels. After all, a weak CNY exchange rate has been reducing the spending power of Mainland tourists. Younger Mainland consumers are shifting their spending patterns, with goods accounting for only 52% of tourist expenditures in early 2023, as opposed to the previous 63%. The emergence of tax-free competitors in Shenzhen and Hainan has proven to be more attractive to price-conscious Chinese shoppers.
Strong HKD encouraged outbound tourism, as evidenced by the diverging retail sales values of Shenzhen and Hong Kong in 3Q. Shenzhen's total retail sales value surpassed 2018 level by 23%, while Hong Kong's was 15.9% below the pre-COVID level. Proposals to extend operating hours at border crossings could potentially flame this trend.
The allure of high fixed deposit rates prompted consumers to save. Overall deposits grew by 5.1% YoY in Dec, reaching HKD 16.2 trillion. Not surprisingly, consumers shifted cash from demand and savings deposits to time deposits. Time deposits, as a proportion of total deposits, increased to 58% in Dec 2023 from 34.3% in Oct 2021.
On trade, exports of goods registered the first YoY expansion of 2.8% in 4Q24 since 1Q22. Looking beyond the low base effect, the outward shipment in 2024 is anticipated to receive robust support due to the bottoming of the electronics downcycle and increasing demand driven by AI. Note that electronics constitute up to 70% of total exports. Yet, challenges are expected to persist amid weak demand from Mainland China. China’s Manufacturing PMI has stayed in contraction territory for 4 months. Meanwhile, that of Hong Kong’s major trading partners also fell, indicating weak external demand from the rest of the world.
Gross Domestic Fixed Capital Formation (investment, GFCF) grew by 15.7% in 4Q after recording a 21.8% YoY in the previous quarter, primarily due to the low base effect. It registered 13 quarters of YoY decline in the past 5 years. Total loans and loans for use in Hong Kong (excluding trade finance) fell by 3.6% and 0.4% in Dec, respectively.
Investment in real estate is bearing the brunt of high rates. Although rental yield is improving alongside decreasing property prices, it remains far below the risk-free fixed deposit rates. Investment demand is consequently being wiped out. Elevated effective mortgage rates are also dampening the affordability of homebuyers. Given such weak demand, real estate developers are offering aggressive discounts to liquidate unsold units.
Hong Kong has reported fiscal deficits for four years since 2019. The fiscal deficit for FY23/24 is expected to surpass the government's projected deficit of 1.8%. Concurrently, fiscal reserves declined from a peak of HKD 1,211 billion in 2019 to HKD 671 billion as of Dec 2023. The ratio of fiscal reserves to monthly public spending dwindled from over 24 months to less than 12 months, accordingly.
A coalescence of outbound migration and foreign corporate relocation remains the major challenge to the city’s fiscal health. The number of salary taxpayers is set to decline on the retreating labour force. The number of foreign regional headquarters fell by 13.3%, compared to the peak in 2019, thereby dragging profit tax revenue. Indirect taxes, such as stamp duties, have diminished due to weakened market sentiment. The stock market's average daily turnover dropped from HKD 105 billion in 2023 to just HKD 96 billion year-to-date. Property transactions are also subdued, with the total number falling from 96,133 in 2021 to only 52,035 in 2023.
Land premium is expected to fall below government expectations. In 1HFY23/24, it only reached HKD 8 billion, or 10% of the target. Considering the significant post-SARS increase in primary market supply in residential property and the soaring vacancy rates in commercial real estate, government revenue from land premium is anticipated to decline further. Hopefully, the lower interest rates environment in 2H24 will support the investment sentiment from developers.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
[email protected]
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HONG KONG DBS (Hong Kong) Ltd Contact: Dennis Lam 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong Tel: 852 3668 4181 Fax: 852 2521 1812 e-mail: [email protected] | SINGAPORE DBS Bank Ltd Contact: Paul Yong 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel: 65 6878 8888 e-mail: [email protected] Company Regn. No. 196800306E
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[1] An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
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