21 October 2016
Hong Kong's growth has fallen below the annual average of the past 10 years as export demand has weakened. Photo: Bloomberg
Hong Kong's growth has fallen below the annual average of the past 10 years as export demand has weakened. Photo: Bloomberg

Why Hong Kong is facing a challenge in its external sector

The Hong Kong government has warned that the city’s economic growth rate would lag behind the average level of the last decade. The city posted real growth of 2.4 percent and 2.8 percent in the first and second quarters of 2015 respectively, below the average 3.9 percent annual growth rate of the last 10 years.

The weakening growth has sparked various concerns.

Hong Kong has posted growth above the 10-year average during 2005-2007 and in 2010 and 2011. That means strong growth for three years prior to the financial crisis and after two years following the crisis.

Actually, the below-average growth now is not unique to Hong Kong.

The International Monetary Fund (IMF) has reduced its forecast for global growth to 3.3 percent for this year, compared with 10-year global average growth of 3.9 percent.

Global economic growth is moderating as a recovery in developed nations has been outweighed by easing growth in developing and emerging economies.

Now let us look at Singapore, which is also a city economy like Hong Kong and almost of a similar size.

In the first two quarters, Singapore’s economy has expanded at 2.8 percent and 1.8 percent respectively, slower than that of Hong Kong. The Lion City’s annual growth was 5.7 percent over the last decade, but the figure has more than halved this year.

In contrast, Hong Kong outperforms in both absolute growth rate and relative economic slowdown. There are signs that the global economic growth slowdown has taken a heavy toll on Singapore.

In Hong Kong, the economic slowdown mainly stems from slower export of goods and services. Over the last 10 years, private consumption, government spending and fixed investments have been the three main growth engines for the city. But the export sector has become a drag now, leading to sluggish growth in the first half of this year.

Hong Kong’s economic growth has eased to 2.6 percent in the six months to June. However, the three internal growth engines contributed 5.8 percentage points of growth, the highest since 2012. That said, the overall economy has been dragged by a weak external sector.

Services exports have always generated positive growth for the city. But things started to change this year and services dragged the GDP growth by 0.9 percentage points. In particular, the tourism service sector was a big drag, as a result of slowing mainland visitor arrivals and increased outbound travel of local residents amid a strong Hong Kong dollar.

Also, falling export of goods has weighed on transport services export, a key part of service exports.

Meanwhile, net export of goods has not dragged economic growth. In fact, it even contributed positive growth. But that may be not good news. Most of the manufacturing industry in Hong Kong has already moved elsewhere, and the city imports almost everything.

Hong Kong has massive entrepot trade, and the city has been posting trade deficits for a long time. In the first half of this year, the trade deficit has decreased due to lackluster external demand.

Over the last decade, we’ve witnessed similar situation only in 2009, when the city was affected by the US subprime mortgage crisis and the global financial turbulence. That has led to falling imports, contracting exports and economic recession.

Now the external economic engine is facing the biggest challenge since the financial crisis.

This article appeared in the Hong Kong Economic Journal on Sept. 23.

Translation by Julie Zhu

[Chinese version中文版]

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Senior economist of Bank of China (HK)

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