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Revised GDP growth forecast for 2022
The fifth wave of the COVID-19 epidemic has brought severe impact on the economic performance in the first few months of this year. The three driving forces supporting the economy, namely exports, private consumption and fixed investment, all performed unfavourably, leading the economy to contract by 4% year-on-year in Q1, and that ended the improving trend from the previous four quarters. Economic data for April are expected to remain relatively weak due to the epidemic. After our latest regular review, we have decided to revise down Hong Kong’s real GDP growth forecast for 2022 to 1-2% from 2-3.5%. This means that the momentum of Hong Kong’s economic recovery will be weaker than expected after 6.3% real GDP growth in 2021. In addition to the impact of the epidemic, continued tensions in China-US relations, the intensifying international geopolitical situation, mounting external inflation pressure and the trend of interest rate hikes all weigh on global and Hong Kong’s economic outlook.
The unemployment rate to be released this week is expected to deteriorate further as it covers the period of February to April, which still reflects the peak of the epidemic. Nonetheless, the epidemic has been gradually brought under control in the past month or so and social distancing measures have been relaxed in phases. Looking forward, if the epidemic situation remains stable, the unemployment rate will likely peak and gradually improve.
Looking back at the changes in the unemployment rate figures in the past few years, it can crudely be said that the figure jumped three times in 2020, starting from 3.4% and rising with an upward trend of “3, 4, 5, 6” within a year to 6.6% at the end of the year. After hitting a high of 7.2% at the start of 2021, the figure showed a three-step descent of “7, 6, 5, 4”, moderating back to 4% at year-end. Entering 2022, the unemployment rate jumped to over 5% in a few months due to the aforementioned factors.
This trend may be able to give us some insights: in order to understand the cause and structure of an issue, we should not only consider the figures on hand, but also observe the trend and factors affecting its change. Only in this way could we anticipate the future and respond appropriately.
Generally speaking, how should we assess the economic performance for the rest of this year when the GDP growth forecast for the year was revised down, with the unemployment rate still rising and capital gradually flowing out? In fact, we do not need to be over pessimistic. As long as the epidemic is brought under control and confidence is maintained, Hong Kong’s economy is expected to stabilise and grow slightly. While it is hard for us to control external changes, as long as we manage the risks and do our job well, pressures and challenges will only make our economy even more flexible and resilient.
For example, while the epidemic has indeed taken a toll on the economy, the current situation has largely stabilised. With the disbursement of the new round of consumption vouchers in April, we should see a notable recovery in retail sales and restaurant receipts in April. It is estimated that the stimulus effect of the two phases of consumption vouchers will boost the economy by 1.2 percentage points. Meanwhile, the various support measures for enterprises, including the new round of the Employment Support Scheme, has helped support the gradual improvement of business confidence, with Hong Kong’s PMI and the diffusion indices on business receipts amongst SMEs rebounding in April.
The rate hikes is another example. The US has raised interest rates by 0.75% this year, and is about to shrink its balance sheet. Under the Linked Exchange Rate System (LERS), the widening HKD-USD interest rate spread, the resulting increase in arbitrage activities and the recent sluggish stock market performance have contributed to a fall in the HKD exchange rate to the "weak-side Convertibility Undertaking" level of HKD 7.85 to one USD. The HKMA has also bought HKD 11.7 billion in the market according to the mechanism, releasing an equivalent amount of USD to maintain HKD within the Convertibility Zone. While the recent US interest rate hike has caused some fund outflows, but that has to be considered against the context of the inflows of about one trillion HKD into Hong Kong between 2008 and 2015, of which only about 12% has left during the fund outflows triggered by the subsequent period of US interest rates normalisation and interest rate hikes (2015-2018). Furthermore, the ample aggregate balance of Hong Kong's banking system (over HKD 320 billion) and foreign exchange reserves (reaching HKD 465.7 billion) enable us to effectively maintain the LERS. We have been closely monitoring the HKD market and related derivatives markets and have not seen any unusual activity. In fact, the HKD Convertibility Zone from HKD 7.75 to HKD 7.85 against one USD amounts to only around 1.3% fluctuation in the HKD exchange rate against the USD. Fund outflow, if any, will not lead to additional business risks considering the limited fluctuation in the exchange rate.
However, interest rate hikes will inevitably affect global fund flows, asset prices and even economic activities, and will also increase companies’ and individuals’ burden of loan interests. The faster pace and greater extent of the interest rate hike this time in the US may result in more far-reaching implications. Yet, the market is constantly adjusting its expectations and gradually digesting the information pertaining to the risk of a faster rate hike. As long as we adhere to prudent risk management principles, have our contingency plans ready, stay vigilant, maintain profitability and flexibility, Hong Kong's economy will continue to move forward stably even amid a complex and volatile environment.
May 15, 2022
