SINGAPORE, April 19, 2018 – Hong Kong’s economic growth strengthened in 2017 and the momentum is expected to continue in 2018, while policy normalization by major central banks will gradually increase domestic financing costs, according to the 2017 Annual Consultation Report on Hong Kong published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared on the basis of AMRO’s Annual Consultation Visit to Hong Kong in September 2017 and data availability as of December 31, 2017.
Real GDP growth rate in Hong Kong for 2017 was 3.8 percent, clearly rebounding from subdued growth of 2.0 percent in 2016, led by improved external conditions and robust domestic demand. Growth is expected to moderate to 3.0 percent in 2018, reflecting tighter global monetary and financial conditions and a slight moderation in China’s growth. Nevertheless, the growth momentum will likely be sustained, as resilient domestic private consumption will continue to provide support to the economy.
Meanwhile, inflationary pressures are expected to remain contained. Headline inflation in 2017 was low at 1.5 percent amid modest inflation in major import partners, while it is expected to rise to 2.0 percent in 2018 due to steady nominal wage growth, rising housing rent, and the depreciation of Hong Kong dollar (HKD) nominal effective exchange rate since early 2017.
Overall monetary and financial conditions continue to be accommodative, while the banking system remains sound and well-capitalized.
Downside risks to growth have receded in the near term, due partly to the improved outlook for China’s economy although policy uncertainty of the U.S. administration, including protectionism, is likely to continue.
Major central banks’ monetary policy normalization, particularly by the U.S. Federal Reserve, will likely result in higher domestic financing costs. Should tail risks including a sudden shift in market sentiment and large capital outflows materialize, the HKD interest rates could also shift higher.
Domestic risks mainly stem from the residential property market. Despite some signs of stabilization since the introduction of another round of demand-side management measure in November 2016 and macroprudential measures for property mortgage loans in May 2017, the market has been buoyant due to strong underlying demand supported by prolonged low interest rate environment and tight housing supply. While there could be a risk of significant price correction in the residential property market should the HKD interest rates increase sharply, the impact on banking stability should be manageable given that the macroprudential measures taken by the HKMA since 2009 have lowered both the loan-to-value (LTV) and debt-servicing ratios (DSR) for mortgage lending, to 48% and 34% respectively. Nevertheless, in the event that such tail-risk were to materializes and given that household debt is at historically high levels and mortgage loans are predominantly in floating interest rates, private consumption may be significantly affected by higher debt servicing burdens and negative wealth effects.
In response to risks emanating from the residential property market, authorities’ initiatives to tackle housing supply shortages and to improve housing affordability are welcome, while the active use of macro-prudential measures will address risks of overheating. The current macro-prudential and demand-side management measures on the property market have successfully contained investment and speculative activities and preserve banking system soundness and therefore should be maintained, with continued vigilance on household borrowing and bank lending practice. Nonetheless, additional tightening measures or relaxation of existing measures could be considered when necessary, as the outlook for the market remains highly uncertain.
Given that the output gap has turned positive and fiscal reserves are ample, the government should deploy fiscal measures to address structural issues such as aging population and inadequate housing supply and to support longer-term growth.
 For brevity, “Hong Kong, China” is referred as “Hong Kong” in the text.
About AMRO and AMRO Annual Consultation Report:
The ASEAN+3 Macroeconomic Research Office (AMRO) was established to contribute to securing the economic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations and China, Hong Kong, China, Japan, and Korea. As an international organization, AMRO fulfils its mandate by conducting macroeconomic surveillance, supporting the implementation of the regional financial arrangements, the Chiang Mai Initiative Multilateralisation (CMIM), and providing technical assistance to the members.
The Annual Consultation Report was prepared in accordance with AMRO’s macroeconomic surveillance function. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.
Assistant Head of Communications, AMRO