Boston, MA -- (ReleaseWire) -- 05/28/2014 -- T he Hong Kong economy narrowly eclipsed our expectations for 2.8% growth in 2013, notching a 2.9% full-year expansion on the back of 3.0% year-on-year growth in Q413. Nevertheless, we remain decidedly below consensus (3.7%) with our 2014 real GDP forecast of 3.0%, with expectations for the ongoing slowdown in China as well as the nascent correction in the Hong Kong property market to take a toll on broader economic activity.
We continue to expect the nascent correction in Hong Kong property prices to continue over the course of 2014. That said, we maintain that the correction is likely to be relatively mild, with price declines in the range of 10-15% within the realm of possibility. Some upside risk to this forecast will remain in play as long as the city-state's supply-side woes, including the government missing its land sales targets, continue.
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Hong Kong notched another budget surplus in FY2013/14, once again defying government forecasts for a modest deficit of HKD4.9bn. Nevertheless, the government has seen fit to tighten the purse strings in both capital and operating expenditure terms in order to shore up the long-term sustainability of its fiscal accounts. Given the government's proactive efforts to maintain a solid fiscal trajectory, we believe that Hong Kong will run a small surplus averaging 0.4% of GDP over the next 10 years.
Hong Kong's democratic reform process, the cornerstone of which is meant to entail the introduction of universal suffrage by 2017, remains an issue of considerable contention between pro-Beijing and pro-autonomy interests. On balance, we believe that the Hong Kong government will not be capable of enacting any substantial reforms that are not tacitly approved by Beijing. While this will likely have little effect on Hong Kong's investment or economic outlook, it could nevertheless undermine the city-state's social stability, and we will be closely monitoring the process as such.
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