2025 Outlook_ Duel Challenges Ahead

Summary of the Conference Call Industry Overview - The conference call focuses on the economic outlook for Hong Kong, particularly in the context of US-China trade tensions and China's deflationary pressures [6][7]. Key Points and Arguments Economic Growth Projections - Real GDP growth in Hong Kong is expected to decline to 2.2% YoY in 2025 and 1.8% YoY in 2026, down from 2.5% YoY in 2024 [7][8]. - The decline is attributed to rising US-China trade tensions and increased price competitiveness from Mainland China, which will negatively impact investment and consumption [6][7]. Trade Tensions and Tariffs - The US is anticipated to implement tariff hikes on Chinese goods in phases over 2025-26, which may cap investment growth in Hong Kong due to increased geopolitical uncertainties [7][19]. - The direct impact of these tariffs on Hong Kong's economy is expected to be manageable, as US-China trade accounts for only 6% of Hong Kong's total re-export business, down from 9% in 2017 [19][54]. Inflation and Consumer Prices - The Consumer Price Index (CPI) is projected to soften to 1.6% YoY in 2025 and 1.2% YoY in 2026, compared to 1.9% YoY in 2024 [8][29]. - This disinflation trend is driven by weaker domestic retail demand and lower prices from Mainland China, although rising residential rental prices due to immigration may offset some of this effect [8][29]. Fiscal and Monetary Policy Constraints - Limited room for counter-cyclical easing is noted, with fiscal reserves declining sharply from HK$1.1 trillion in early 2018 to HK$0.6 trillion today [9][44]. - The fiscal deficit for FY2024-25 is expected to reach HK$100 billion, more than double the initial budget estimate [44][46]. Risks and Scenarios - Key risks include the Federal Reserve's monetary policy, Beijing's stimulus measures, and geopolitical risks [11][48]. - In a downside scenario, higher market interest rates and universal US tariffs could lead to weaker investment activity and lower asset prices in Hong Kong [12][48]. - Conversely, an upside scenario could see consumption-driven growth in China benefiting Hong Kong's trade, as Mainland China accounts for 56% of the city's goods exports and ~80% of inbound tourists [14][48]. Foreign Direct Investment (FDI) Trends - FDI to Hong Kong has seen a significant decline, dropping by approximately 20 percentage points of GDP during the 2018-19 period, with a notable decrease in the number of US companies establishing regional headquarters in Hong Kong [53][54]. Housing Market Dynamics - The effective new mortgage rate in Hong Kong is expected to drop to 3.25% by the end of 2025, which may positively impact the housing market despite high unsold inventory [37][38]. - Residential housing prices are projected to decline by another 5% in the first half of 2025, followed by a potential rebound in the second half [37][38]. Additional Important Insights - The HKMA is well-positioned to defend the HKD peg, with liquid USD assets maintained at 1.1 times its liquid HKD liabilities, indicating sufficient cover for potential outflows [10][11]. - The strategic importance of the Linked Exchange Rate System (LERS) is emphasized, as it facilitates free capital flows and mitigates financial volatility [57]. This summary encapsulates the critical insights from the conference call regarding Hong Kong's economic outlook, highlighting the interplay between external trade dynamics, domestic economic conditions, and policy constraints.