Hong Kong's economy slowed down in the first quarter compared to the last quarter of the previous year as exports dipped with soft global demand.
According to the report released by the Statistic Department, the gross domestic product of Hong Kong rose 0.4 percent year-on-year, down from 3 percent increase in the last quarter of 2011. Total exports of goods fell 5.7 percent in the first quarter compared to a year earlier.
Growth was held back by household spending, which fell 0.2 percent in the first quarter from the previous quarter. This was the first outright decline since the beginning of 2009.
The weak external environment is likely to weigh on the economy this year, affecting not just exports of goods and services but also the domestic sentiment. Though a sharp drop in exports is not expected, the sluggish growth is likely to continue.
Given the importance of exports to Hong Kong, with exports of domestic goods and services are equivalent to around 60 percent of GDP, fiscal policy will only be able to provide limited support in the event of a slump in exports.
Certainly, a major risk faced by Hong Kong is the situation in the euro zone. As a trade dependent economy with a large financial sector, Hong Kong would be hit particularly hard if escalating crisis in the single currency area caused credit markets to seize up and global demand to slump, Mark Williams and Gareth Leather of Capital Economics said.
Moreover, owing to the Hong Kong dollar's peg to the US dollar, monetary policy cannot be loosened to support the demand. The peg to the US dollar restricts Hong Kong's ability to control prices and makes it more vulnerable to asset bubbles.
The property market is another critical risk factor faced by Hong Kong. Relative to incomes, property prices look as overvalued now as they did before the 1997 crash. There seems little prospect of a steep hike in mortgage rates given the likelihood that official US rates will remain very low. But weaker growth in China could cause demand to crumble, especially at the high end of the market, Williams and Leather said.