Analysts give cautious forecast after a rough 2016 (Amended)

Singapore

HONG KONG'S economy looks to remain mired in global uncertainty in 2017, even after hints of a modest recovery from the worst of 2016's declining retail sales, rising trade tensions, unprecedented property cooling measures and growing local dissent.

According to the Chinese Special Administrative Region's third-quarter economic report, the Hong Kong economy expanded by 1.9 per cent year-on-year in real terms in the third quarter of 2016, slightly faster than the 1.7 per cent growth in the preceding quarter.

"Domestic demand gathered pace in the third quarter of 2016, as private consumption regained some momentum and overall investment spending rebounded notably," deputy government economist Andrew Au told The Business Times. "Our external trade also saw relative improvements amid the stabilisation of the external environment."

The labour market held largely stable and remained in a state of full employment, with the seasonally adjusted unemployment rate staying low at 3.4 per cent in August to October. Consumer price inflation stayed modest, averaging 2.4 per cent in the first 10 months of 2016, slightly down from 2.5 per cent in 2015.

"In the first three quarters of 2016, the Hong Kong economy grew by 1.4 per cent year-on-year, and will likely attain further modest growth in the fourth quarter," said Mr Au, adding that real gross domestic product (GDP) growth for 2016 as a whole is forecast at 1.5 per cent.

"Looking ahead, the global economic outlook is still subject to various uncertainties, which may lead to unsteadiness in the external trading and monetary environment," he said.

"The more notable challenges or uncertainties are those associated with the US Federal Reserve's pace of future interest rate moves, monetary policy divergence among major central banks, as well as "Brexit's" ongoing developments.

"The market is also concerned about possible changes in US economic policy directions under the new administration. The slow recovery in some advanced economies is another cause for concern."

In its economics markets strategy report released on Dec 8, DBS analysts noted that their outlook for Hong Kong in 2017 "remains cautious" because of three key factors: uncertainty over US trade policies with China after Donald Trump was elected as the next US president; the introduction of heavy stamp duties on purchases of property; and the relative strength of the Hong Kong dollar against other currencies which hamper tourism and retail.

Latest figures from the Hong Kong Census and Statistics Department show that retail sales value from January to October this year fell about HK$35 billion from the same period in 2015, to a total of HK$358 billion.

"There have been a lot of negative factors affecting Hong Kong's retail industry, coupled with strain from the US dollar, the downward slide of the euro and Japanese yen, so people are going to those countries instead of Hong Kong," said Michael Cheng, PwC's Asia-Pacific and Hong Kong/China retail and consumer leader.

"Our selling prices are not as economical, and tourists are not spending as much as they did before. There has also been political uncertainty this year . . . with a number of disputes that happened throughout the year (and) the uncertainty of the CE (chief executive, Hong Kong's top official) also affecting the industry."

Anti-Beijing sentiment has been growing since the 2014 "umbrella movement" mass protests.

In September, pro-democracy activists who support greater political autonomy or outright independence from China were elected to Hong Kong's 70-member legislative council as lawmakers after a record 2.2 million people went to the polls.

But two were subsequently dismissed from the council after swearing allegiance to a "Hong Kong nation" instead of to Hong Kong as part of China, and more pro-democracy lawmakers face ongoing scrutiny and the possibility of removal.

Mr Cheng sees flat growth in 2017, or perhaps a slight drop of 1-2 per cent. But he said that his forecast for 2018 will be better in part because the March 26 chief executive election will see a new face replacing unpopular Beijing-backed incumbent leader Leung Chun-ying, who has decided not to run for a second term.

"The new CE, no matter who it is, will try to do something to boost the retail industry, so it will be positive," Mr Cheng told BT. "Real estate prices might come down . . . which means retail rents go down, reduce costs to retailers and lowering prices."

The Hong Kong Trade Development Council's principal economist for global research, Daniel Poon, had similarly subdued forecasts for trade in 2017 in a Dec 14 report.

Total exports for the January to October came in at HK$2.9 trillion, about HK$75 billion less than the same period in 2015.

"Hong Kong exports are not expected to fare much better in 2017 than in 2016, with value sales expected to show zero growth," wrote Mr Poon.

"Downside risks to this forecast include rising trade tension triggered by US president-elect Donald Trump's promised protectionist policies, possible deflationary shocks in the EU and Japan, untamed volatility of capital markets, a marked slowdown of the Chinese economy, and escalated geopolitical tensions."

Standard Chartered Bank (Hong Kong) senior economist Kelvin Lau told BT that 2016 "is probably the trough of the business cycle" but cautioned that 2017 could also bring more challenges. This is because he anticipates further geopolitical uncertainties limiting any export recovery, and the beginning of the end of low interest rates that could lead to more financial market volatility.

"Economic recovery is likely to be very modest and gradual in 2017 across most sectors," said Mr Lau.

"Short term, it is all about bracing against potential shocks and more volatility in the renminbi, in capital flows and in USD (and therefore HKD) interest rates. Long term, Hong Kong needs to continue to develop its competitive strengths and position itself to capture the opportunities stemming from a cyclically stabilising and structurally transforming China."

Amendment note: An earlier version of this article incorrectly referred to Mr Michael Cheng on subsequent mentions as Mr Cheung. The article above has been revised to reflect this.