Morgan Stanley economist Denise Yang notes that there was a slowdown in growth in the Hong Kong economy from 8% in Q1 to 5.2% YoY in real terms in Q2. After upgrading forecasts for China, she has upgraded Hong Kong forecasts as well:
Continued strong growth in the Chinese economy has provided great opportunities for Hong Kong, which realized 6.6% average real growth in 1H06. We had revised up our growth forecasts for the Chinese economy last month following the 2Q06 GDP report (see Overheated Growth Persists Amid Ineffective Tightening, July 18, 2006), to allow for further delay in the anticipated slowdown. Consistent with stronger growth in China, we are also upgrading our forecasts for Hong Kong. We now expect the economy to expand by 5.6% in real terms in 2006 (revised from 5% previously), and 4.5% 2007 (versus 4.2% previously). Our revised forecasts remain at the low end of consensus, nevertheless, as we remain wary of a slower global economy ahead, which would hurt Hong Kong’s trade growth, and further tightening of monetary conditions in China and the rest of the world, which would hurt Hong Kong’s asset market performance.
Consumption and investment sentiment in Hong Kong remains heavily influenced by asset market performance, in our view. The ongoing gradual appreciation in the renminbi and persistent optimism on the currency has continued to support liquidity conditions and hence asset prices in Hong Kong. However, we do not believe that it is prudent to justify bullish forecasts for domestic demand based on aggressive assumptions on anomalous monetary conditions and asset prices. Therefore, in our central case, we continue to look for a gradual normalization of growth following above-trend growth since 2004.
See Ms. Yang's full analysis.