OUTLOOK: Hong Kong 2001 GDP 1.5-4.0 pct, undercut as U.S. economy slows
HONG KONG (AFX-ASIA) - Hong Kong is expected to record 1.5-4.0 pct GDP growth this year but the higher forecasts could be in doubt given the faster-than-expected slowdown in the U.S. economy, economists said. Most economists surveyed by AFX-ASIA have revised downwards their growth projections for Hong Kong on concerns over the external environment, namely the downturn in the U.S. and Japanese economies, although the government has as yet given no indication it will revisit its 4.0 pct 2001 forecast. At the same time, they said they have not ruled out further cuts in their economic projections for 2001 once Hong Kong's first quarter GDP data is released and some do not rule out the possibility that Hong Kong will experience a technical recession. In the fourth quarter last year, Hong Kong GDP was up 6.8 pct year-on-year but down 0.1 pct quarter-on-quarter. Weak private consumption is expected to dampen the local economy, with economists seeing little boost coming from the interest rate cuts in the U.S. They said interest rate cuts theoretically stimulate economic growth but in an environment where property prices remain weak and job security is a major concern, consumers are unlikely to embark on any spending spree in the short term. ABN Amro economist Marvin Wong said he cut his 2001 GDP forecast for Hong Kong to 1.5 pct from 3.5 pct after the fourth quarter figures as they indicated that the economy had deteriorated more rapidly than anticipated, with private consumption down 2.9 pct. This contraction was the worst recorded since the first quarter of 1998, when Hong Kong was deep in the Asian financial crisis. "Although private consumption has improved since 1998, it seems to have deteriorated (again) rather quickly," he said. Wong said that he expects the U.S. will see a 'V-shaped' recovery, with its economy bottoming out in the second quarter and improving in the second half of the year. However, "if things turn out to worse-than-expected, then a further downgrade on Hong Kong's economy is possible," he said, noting at the same time that there will be a lag effect on any improvement in the U.S., with local exports likely only to pick up again in the fourth quarter. Wong also dismissed widespread anticipation that interest rate cuts will stimulate the economy given that liquidity is not the problem. "It is difficult to see the economy being stimulated as the loans to deposit ratio is very low. Prior to the crisis, the banks lent to the residential mortgage market and to developers but now there is a stock overhang in the property market." Hong Kong also managed to post a double-digit growth last year despite the fact that there was an upturn in U.S. interest rates. "Since the high interest rates did not deter an improving Hong Kong economy last year, surely a reduction is unlikely to spur the local economy (now)," he said. HSBC chief economist George Leung said he has cut Hong Kong's 2001 GDP forecast to 2.2 pct from 3.4 pct on concerns about current global prospects and the volatility in financial markets. "We are concerned about the deteriorating global economy, in particular the U.S. and Japan, which is expected to affect Hong Kong's external trade." Despite lower interest rates, there has been little response seen in Hong Kong's economy, Leung said, adding that he may review his current forecast when first quarter GDP figures are released. He said he expects the U.S. to experience a 'U-shaped' economic recovery, which will only begin to be felt by the end of the year, and locally private spending will continue weak despite interest rate cuts. Although mortgage payments are cut with lower interest rates, residents also get lower returns from their savings, he noted. He said the issue of property purchases is linked to confidence and not whether Hong Kong residents have the ability to buy houses or how low the interest rates are. "If property prices slip further, they will not want to buy. (Low) interest rates are just for a short cycle ... 2-3 years, but buying a property takes 10 years or longer." Leung is looking at a 0.3 pct quarter-on-quarter GDP growth for the first quarter, adding that he is not ruling out a negative outcome. ING Barings has cut its 2001 GDP forecast to 4.0 pct from 5.0 pct but expects the U.S. economy to recover in the second half to support exports and global growth. Economist Craig Chan said private consumption in Hong Kong is expected to stabilise and grow in the second half, to give a full-year 2001 gain of 3.5 pct. "Overall we will see a continued slowdown in the first half but things will turn around in the second half. The key point is when the U.S. will recover," he said. Chan sees deflation of 0.5 pct in 2001, reversing an initial inflation projection of 1.0 pct. Morgan Stanley Dean Witter economist Denise Yam, however, said she is sticking to her initial 3.8 pct forecast made at the start of the year. "After looking at all the figures and news, we have no reason to downgrade or revise the figures at this point of time," she said, adding that her 3.8 pct forecast "would be easy to achieve". Growth will come from the Hong Kong ernment's fiscal support in its deficit budget and from the services sector in relation to mainland China. "These two will give meaningful support to the (GDP) growth projection," Yam said, adding that she expects private consumption to match GDP growth this year. Yam said she also feels that deflation can be positive in that it boosts purchasing power. "Inflation tends to (damage) purchasing power and real growth. While deflation is often seen as a negative thing, in Hong Kong, which is small and open, and the income is externally driven, deflation enhances purchasing power," Yam said, estimating 1.0 pct deflation in 2001.
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