By James Pomfret
HONG KONG (Reuters) - Strong consumption, as well as frothy stock and real estate markets likely bolstered Hong Kong's economic growth in the fourth quarter, but higher U.S. interest rates and easing China capital inflows may pose broader risks to growth this year.
With the economy showing signs of moderation, the government will probably announce short-term relief measures and capital spending initiatives to sustain growth in an expansionary budget on Wednesday, local media reported.
As one of the most open and free economies in the world, Hong Kong's growth is highly reliant on capital, trade, tourist and investment flows from China. A surge in domestic spending, a rise in visitors from the mainland and improved retail spending helped ramp up GDP last year after a difficult 2016.
"We think private consumption is likely to remain resilient on the back of stable growth," wrote HSBC economist Kelvin Lam. "More specifically, the retail sector, one of four main pillars of the Hong Kong economy, will likely continue to be supported by the recovery in tourist arrivals and stable domestic demand."
Six economists surveyed by Reuters expected fourth quarter growth of 3.2 percent from a year earlier, down from 3.6 percent in the July-September quarter. The economists did not provide quarterly forecasts. The third quarter expanded a seasonally adjusted 0.5 percent.
The still-solid momentum in the final quarter will bring full-year growth to an estimated 3.7 percent - the fastest since 2011 - and up from 1.9 percent growth in 2016.
The former British colony has seen brighter economic data in the past few months as buoyant markets helped boost consumer spending, prompting the government to raise its full-year growth outlook to 3.7 percent late last year.
Economists forecast the financial hub's growth to ease in 2018 to 3.1 percent. GDP figures are due at 0300 GMT on Wednesday, along with the budget for the 2018/19 financial year.
BUDGET
Financial Secretary Paul Chan is expected to unveil a more expansionary budget on a bumper fiscal surplus of more than HK$160 billion ($20.45 billion), according to global consultancy EY.
While Chan may resist calls for short-term sweeteners such as cash handouts, local media say he will focus on livelihood challenges including a widening wealth gap and improved medical support for the elderly.
He will also seek to help innovative and creative industries through tax incentives, a start-up fund and investments in sectors such as artificial intelligence, fintech and biomedical science, with the city seen lagging far behind rivals like the southern China tech hub of Shenzhen, and Singapore, reports say.
With the current bumper surplus, the city's fiscal reserves have now swelled to around HK$1 trillion ($127.8 billion), according to EY.
"The combination of two-tier profits tax rates regime, short-term relief measures and capital spending initiatives would likely boost 2018 GDP," Nomura analysts Young Sun Kwon and Minoru Nogimori wrote in a research report.
Hong Kong has hovered near full employment with a jobless rate of 2.9 percent in December, the lowest level in nearly two decades since the 1997 Asian financial crisis.
The property sector, however, is seen by analysts as a potential risk as U.S. interest rates trend higher and weigh on mortgage payments and household consumption.
Hong Kong's home prices have surged for 14 straight months, further exacerbating public discontent toward housing affordability in the city of 7.4 million.
In spite of official efforts to cool prices, analysts see a further 5 to 20 percent rise in prices this year due to liquidity and a severe supply-demand imbalance.
