Hong Kong’s economy remained on the deceleration track for the first quarter of 2019, shown by the recent slowdown in GDP growth on top of the already slow expansion in 2018. The slowdown came from many components – uncertainties over the US-China trade war and sluggish external demand led to weaker performance in external sectors while domestic demand also lost momentum on the back of cautious local sentiments.

In addition, decelerating exports widened the overall trade deficit. Recent data point to a continuation of decline in both exports and imports as the trade war between China and the US escalates, which clouds not only future trade prospects but also the regional investment outlook. Echoing the underwhelming performance in Q119 is that on a monthly basis, exports and imports declined for four months straight since January as uncertainties over the Sino-US trade dispute and weak global demand continued to dampen production and trading activities in Asia.

Against such a negative international backdrop, local business confidence remained in contraction, which also pushed down the growth of domestic investment and retail sales. This clearly does not bode well for future economic growth given how dependent the Hong Kong economy is on consumption. What’s more, business sentiment surveys also exhibit overall worries on the business situation ahead. That said, the Hong Kong labor market remained robust, with the unemployment rate kept constant at a low level.

The resilience of the labor market is expected to buffer the potential shocks to consumption and investment. In addition, moderate growth of nominal wages also helped keep business costs steady. Going forward, external uncertainties are expected to continue putting pressure on retail sectors in the near term, but we at Natixis expect tight labor-market growth and gradually recovered inbound tourism spending to buffer the negative shock.

As one of the pillar industries for Hong Kong, transportation and logistics was also hit hard by escalating uncertainties. The deceleration trend in transportation continued with declines in cargo handled by road, port and air. The silver lining, however, lies in passenger movement, which shows signs of continued expansion in thanks to the operation of the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link and the Hong Kong-Zhuhai-Macau Bridge as well as the holiday effect.

As for Hong Kong financial markets, the liquidity environment has been improving. The Hong Kong Interbank Offered Rate (HIBOR) remained at low levels before picking up in April and May. Driven by carry trades over a widening interest-rate spread between HKD and USD, the Hong Kong dollar weakened against the greenback, touching the weakest convertibility rate and triggering the Hong Kong Monetary Authority to intervene during May. However, it started to rally in June as the US dollar weakened. As recent anti-extradition protests triggered abnormal performance of the Hong Kong dollar, we recommend paying close attention to liquidity situations.

Overall, Hong Kong’s stock market seems to have priced in more of the financial factors than economic fundamentals. The Hang Seng Index recorded strong momentum in the first quarter thanks to the dissipation of expectations that the US Federal Reserve would raise its policy rate as well as the then-reported progress in US-China trade talks. The reversal of trade-war negotiations deteriorated the performance of the Hang Seng Index until recently, when it has regained momentum. Going forward, near-term performance of the Hong Kong stock market could be volatile on the back of investment decisions influenced from anti-extradition protests and rising political uncertainties.

What’s more, there is also significant recovery in the property market. The transaction volume of residential properties picked up to a large extent in both primary and secondary markets in the first quarter of 2019 compared with the previous quarter. On the commercial-property front, rentals for offices and retail also registered growth. An improving property market and stock market can be beneficial for domestic demand in Hong Kong through the valuation effect, buffering potential future uncertainties in the near term.

Moving forward, although favorable labor-market conditions and robust inbound tourism should provide some support in the near term, and a dovish Fed should also help in terms of the liquidity environment, we hold a cautious view on the economic outlook for Hong Kong, as the economic fundamentals are likely to worsen further on the back of the escalated uncertainties, which stem from not only the China-US trade war but also an increasingly likely hard Brexit. For example, the recent decline in exports and imports may spill over into future performance as the tariffs raised by US President Donald Trump on Chinese goods take effect.

Also, the recent social protest against the extradition bill has brought uncertainties to the political environment surrounding Hong Kong and has in effect held up investment decisions, triggering large societal and economic impacts. As such, we have lowered our forecast for economic growth to 2% for 2019, the lower band of the Hong Kong government’s growth forecast for the year.