Hong Kong - Unexpected Signs of Resilience

The economic news from Hong Kong is almost as black as it can be. In 3Q GDP shrank 2.9% yoy in 'real' terms and, probably more importantly, shrank 0.5% yoy in nominal terms. That's the first contraction in nominal terms since 2008.

In nominal terms, gross fixed capital formation dropped 14.7% yoy, with building & construction down 4.4% and everything else down 24% yoy. Given the long-production runs involved in building and construction, it would be astonishing if that 4.4% yoy fall in construction didn't deteriorate dramatically in the medium term. Still, even though the breakdown in investment ex-construction means that my estimate of capital stock growth has fallen to zero, this still means that the ROC directional indicator has inflected downwards. In other words, even if the political situation somehow miraculously relaxed with Hong Kong reverting to calm and pretending none of this had happened, the incentive structures underpinning sustained GDP growth have already deteriorated.

Nevertheless, things are only almost as black as it can be: there is one completely unexpected sign of resilience. It is this: Hong Kong has for now somehow clung on to its ability to price its services internationally. This is a genuinely unlikely achievement, since in nominal terms services exports dropped 13.9% yoy in 3Q - a collapse surpassed only in 2Q09 (when they fell 15.7% yoy). Worst hit was travel, down 33.3% yoy, but in addition transport fell 11.2%, financial services fell 1.5% (only), and 'others' fell 6.3%.

Despite this, the price Hong Kong charged for its services exports slid only 0.5% qoq and 0.2% yoy. This leaves prices charged still on the historically high plateau which has been sustained over the last two years. The ability to price its services exports is, of course, absolutely central to Hong Kong's commercial existence and, given the role that they play in sustaining commercial property prices, much of its financial base too. What is perhaps even more surprising is that the price Hong Kong paid for its services imports fell by 0.8% qoq - that's a harder fall than its services export prices, so Hong Kong's services terms of trade actually improved 0.4% qoq (but slipped 0.1% yoy from a historically high base of comparison).

This unlikely short-term resilience isn't much to hang on to. But for now it's probably the best fingerhold available for the SAR.