Hong Kong economy shows more signs of overheating--Hang Seng

Despite growing economic growth of 7.2% in the first quarter, business has become less willing to commit investment spending, as companies see more challenges ahead, according to a Hang Seng report.

The Hong Kong economy grew at a brisk pace of 7.2% in the first quarter, marking the fifth straight quarters of above-trend growth. The latest economic reports showed that external demand was easing, but buoyant consumer demand should continue to underpin growth. At this stage, Hang Seng see decent growth of 5.5% for 2011. The government also raised this year’s GDP forecast to 5% to 6% from an earlier estimate of 4% to 5%.

Rising price pressure are emerging from all fronts, warning signs of overheating, as the Hong Kong economy may be running close to full capacity and the labour market is near full employment after several quarters of above-trend growth. The government raises this year’s inflation forecast to 5.4%, from an initial estimate of 4.5%. We have revised up our inflation forecast to 5.3%, from an earlier estimate of 4.7%.

Sustainable Growth?
Underpinned by buoyant consumer demand, steady investment and strong exports, the Hong Kong economy grew at a brisk pace of 7.2% in the first quarter, marking the fifth straight quarters of above-trend growth.
The stronger-than-expected consumption contributed 4.7 percentage points to the first quarter’s growth on the back of rising income and brighter job prospects. However, business has become less willing to commit investment spending, as companies see more challenges ahead and the pace of stock accumulation has slowed.

The contribution of net exports of goods and services to the overall growth was 6.7 percentage points in the first quarter, much higher than the 2.4 percentage points in the previous one, reflecting stronger exports relative to imports.

Consumer Demand Remains Robust
The latest economic reports showed that buoyant consumer demand should continue to underpin growth. Retail sales value grew 27.7% and the unemployment rate hovered around a two-and-a-half year low of 3.5% in April.

Exports Ease
Exports seemed starting to show the impacts of Japan’s earthquake disruptions on the global supply chains, growing merely 4.1% in April, easing sharply from a growth of 21.5% in March.
The adverse impacts of Japanese earthquake/tsunami disasters on global supply chains should be more obvious in the coming months.

Moreover, the latest leading indicators, like Purchasing Managers' Indices from the US and the Mainland, suggest easing momentum, reflecting partly the impacts of high oil prices.

Price Pressure Emerges from All Fronts
Rising price pressure are emerging from all fronts, warning signs of overheating. Consumer prices rose 4.6% in April, on the back of rising housing rentals, soaring oil and food prices, reflecting strong demand at home and the effects of a weaker currency.

The inflation reading was the highest since August 2008.

Wage growth also picked up and might soon feed-through to a broader base, as the economy is running near capacity and the labour market is close to full employment.

The government raises this year’s inflation forecast to 5.4%, from an initial estimate of 4.5%. We have revised up our inflation forecast to 5.3%, from an earlier estimate of 4.7%.

Economic Forecast
The latest economic reports showed that external demand was easing, but buoyant consumer demand should continue to underpin growth. At this stage, we see decent growth of 5.5% for 2011.

The government raises this year’s GDP forecast to 5% to 6% from an earlier estimate of 4% to 5%, in line with our estimate.

Rising price pressure are emerging from all fronts, warning signs of overheating, as the Hong Kong economy may be running close to full capacity and the labour market is near its full employment after several straight quarters of above-trend growth.

The government raises this year’s inflation forecast to 5.4%, from an initial estimate of 4.5%. We have revised up our inflation forecast to 5.3%, from an earlier estimate of 4.7%.