Hong Kong weathers economic headwinds from the West

Economic outlook faces headwinds but still looks good
Hong Kong’s growth outlook is facing headwinds from weaknesses in the West and rising domestic inflation. Low policy rates, unemployment at pre-crisis levels, and high rents will constrain inflation from coming down significantly in the near term. As a result, we forecast inflation at 5.2% in 2011.

As an international financial centre, Hong Kong has trade and investment links with Europe and the US. An export slowdown is the main risk if the West faces a sharp downturn. Banks also have exposure to Europe through securities holding, etc. (4-10% of assets), though the bulk of it is to the UK, Germany and France.

Despite these rising risks, we remain comfortable overall with Hong Kong’s economic outlook, which is driven by domestic factors, such as household and investment spending. We expect only a transitory slowdown in mainland China. We forecast 5% GDP growth in 2011 and 4.9% in 2012 for Hong Kong.

For mainland China, we expect real GDP growth of 9.3% in 2011 and 10% in 2012, with inflation at 5.1% in 2011 and 4.8% in 2012. These still-reasonable growth expectations remain largely supportive of the banking sector, in our view.