Hong Kong:Higher growth on inventory and a strong housing market

GDP grew by 0.6% q-o-q in Q3 (Consensus: 0.3%) after a sharp rise of 1.6% in Q2.

    We do not expect the recent rebound, led by inventories and the housing market, to be sustained.

    As such, we maintain our below-consensus GDP forecast of 0.5% in 2017, but acknowledge that this could slow to 0.1% if US policy changes prove extreme.

    Growth of Q3 GDP remained relatively high at 1.9% y-o-y after a 1.7% gain in Q2, but was 0.6% q-o-q. The contribution to growth from inventories (2.0 percentage points (pp) in Q3) continued to rise and fixed capital formation (1.3pp from -1.2pp) suggested the recent strong housing market supported higher growth in Q3 (Figure 1).

    We do not expect the rebound led by inventories and the housing market to be sustained. The PMI in October fell by 1.1pp to 48.2 in October, as the stocks of purchases (inventory) index fell by 4.7pp, suggesting inventories may contribute less in Q4. Although the housing market has been recovering through October, we expect it to resume a weakening trend as the new higher stamp duty bites and on a Fed rate hike, which Nomura forecasts for December (Figure 2; see Hong Kong: Stamp duty hiked in effort to cool housing market, 7 November 2016).

    Moreover, the US policy agenda could pose further downside risk as Hong Kong is the entrepot for a significant amount of business between China and the US. Declining trade volumes would be negative for local business. Concerns over US protectionism and a deteriorating relationship with China could be hugely detrimental to the financial sector and property markets. We forecast GDP growth of 0.5% in 2017, but acknowledge this could slow to 0.1%, from 1.2% in 2016 (see What Trump means for Asia, 9 November 2016).