The air went out of the Hong Kong economy in the second quarter of the year as real GDP slowed from 2.6% in January-March to 1.8% in the second three months of the year. The first graph shows the decline, and the rise in prices as measured by the broad, national accounts deflator.
Slower growth was evident in private consumption expenditure and international trade while capital investment fell sharply, by 5.6%. On the household side, durable goods purchases fell 5.1% after expanding 4% in Q-1; non-durables were down 10.6%, the deepest slump in over a decade. Tourist spending also fell, by 11.5% after six straight quarters of double-digit growth.
The private sector also dragged down capital investment: public spending rose 0.2% from a year earlier, but a 10.3% drop in machinery, equipment and intellectual property investments pulled the entire segment into negative territory for the first time in more than a year. Including investment in building and construction, private capital investment fell 7% from Q-2 2014. The second graph has the evidence.
The domineering trade sector didn’t help matters. Goods and services exports rose 1.4%, modestly more than the 1% recorded in Q-1; broad imports expanded 1.5% after a 1% rise earlier in the year. Faster growth in imports than exports mathematically reduces overall GDP expansion.
On the services side, things didn’t look quite so good. Sales fell 2.3% while purchases rose 5%. Again, math raises its ugly head: if services exports had remained at the level of a year ago, the overall economy would have expanded a full 3% in 2014’s April-June quarter.
Travel services is the key culprit, with sales of our services to foreign residents falling 11.5% while our own purchase of other economies travel services rose 11.2%, both in real terms. To put it in perspective (and in real 2012 dollars), the $9 billion expansion in the second quarter was despite a $8.7 billion drop in travel services exports. As the third chart graphically illustrates, annoying tourists isn’t such a great idea.
Even excluding earnings from abroad, the economy is weak. Domestic demand rose just 2.2% in the first half. The broad consensus for the full year is down from the 3.5% real growth to about 3.1% and our own expectations of 3-4% expansion are starting to look overly optimistic.
We don’t live in a vacuum, however. While the US and China are holding their own, Japan’s economy fell slightly (year-on-year) in the second quarter on weak consumer demand. Household spending fell 2.7% from Q-2 2013 while capital investment continued to rise, by 5.3%. Overall GDP fell 0.13%.
The good news is that after 18 straight quarters of deflation – the second longest in post-war history – the GDP deflator rose more than 2% from a year earlier. The longest run of collapsing prices, from 1998 to 2008, lasted 42 quarters. Mr Abe seems to be achieving at least one of his key objectives.