Property cooling measures could hinder near-term investment into economy

Gradual recovery in 2018 is also projected.

Citi has raised its 2016E GDP estimate to 1.5%yoy, and also has noted that it expects gradual recovery in 2018E.

According to a research note from Citi, its new forecast implies that 4Q is likely to grow at 1.7%yoy or 0.1%qoq SA. Citi thinks property cooling measures may slow consumption and investment near term. Tightening of China’s capital account controls on investment type of insurance premiums and global market volatilities may dampen some of the financial services momentum in 4Q16E.

Meanwhile, Hong Kong has remarkably endured a wide range of global volatilities thus far this year. Liquidity inflows (on a variety of reasons) have been a strong buffer to economic activities. Given the list of global uncertainties have not shortened even as the year comes to a close, Citi would like to caution investors that while HK will likely remain on a slow recovery course in 2018E on an unbalanced but recuperating global economy, and wide volatilities inevitably will continue next year.

Here's more from Citi:

In light of rising demand globally for fiscal support, we expect the HK government to further expand its welfare policies in the Policy Address & Budget Speech in Jan & Feb 2017, while public infrastructure spending on rail links, highways and public housing are expected to continue at the quickest possible pace that construction labor capacity allows.

3Q GDP outperformance driven by strengthening in domestic demand. The further pickup to 1.9% yoy and 0.6% qoq sa in 3Q was better than expected. In particular, investment posted a rebound of 6% yoy in 3Q after four quarters of negative growth and contributed 1.3ppt to the quarter’s GDP, as both machineries/equipment and construction expanded. Private consumption improved to 1.4%yoy added 0.8ppt to GDP.

These two segments along with steady government spending (3.3%yoy and +0.3ppt) and inventories (+2ppt) were the contributors to 3Q GDP growth. Growing contribution to GDP by inventories for the fourth quarter reflected rebuilding business confidence and expectations of better demand outlook near term; however this volatile segment can easily swing negative should global volatility rise going forward.

Net exports turned to a drag in 3Q. Exports of goods grew mildly further by 1.9%yoy on slowly recovering global trade, while decline in exports of services moderated to -1.8%yoy in 3Q (vs. previous quarter’s -4.6%yoy). Exports of services improved in 3Q on the stronger logistica/trade services, higher numbers of IPOs and stabilizing of tourist arrivals trend (albeit at a low equilibrium). The growth in imports (2.3%yoy) was higher than the growth in exports (1.1%yoy) in 3Q, due to the rebound in retained imports.

While HK re-exports most of its imports, we suspect the higher retained imports may be a reflection of both somewhat better domestic demand and higher unit price of commodities. On a net basis, the 2.4ppt drag in net exports to 3Q is offsetting better performance in domestic demand, and we expect drag to persist in 4Q. However, overall better trading activities (imports + exports) is encouraging for employment in the logistic sector (which we estimate to be ~13% of total employment).