Hong Kong’s economic woes, caused by six months of street protests, will stretch into 2020 as the devastated sectors of retail and tourism struggle to recover against the backdrop of slowing global trade.
The economy is already in a technical recession – having contracted for two straight quarters. It has shrunk by 2.9% in the July-September period following a 0.4% contraction in the April-June period. This marked a GDP contraction of 0.6% in the year to date from 2018.
There is more bad news in the pipeline.
” Two-thirds of the year-on-year negative growth of 2.9% in Hong Kong was caused by these violent shocks and social unrest. Although the statistics for the fourth quarter will be released early next year, Judging from the situation in these months, it is unavoidable to continue to show negative growth,” Financial Secretary Paul Chan said in a blog post.
Earlier this month, data showed retail sales fell in October fell 23.4% from a year ago, the sharpest fall on record. Tourist arrivals in October fell 43.7% on year to 3.31 million, according to the Hong Kong Tourism Board, an increase from the 34.2% drop in September.
The months of anti-government protests and violence triggered a freefall in tourist arrivals and a plunge in retail business. The government has already made two downward revisions of GDP for the year – the first annual contraction in a decade.
The official GDP forecast for the year was slashed to -1.3% from the 0-1% forecast made in August, making it the first annual contraction since 2009. In May, it had forecast GDP would grow by 2-3% in 2019, the month before the protests began.
The economy remains in contraction mode in Q4 as targeted fiscal stimulus in the areas of retail, tourism, and logistics, will be insufficient to avert continued recession and shrinkage will continue in 2020, economists say.
“There are still no signs that the political deadlock triggered by the now-withdrawn extradition bill will end soon. Retail sales and tourist-related sectors are experiencing their worst performance in over a decade and will remain under huge strain. Consumer and business sentiment will stay weak,” said Tommy Wu, senior economist at Oxford Economics in an emailed response to Asia Times.
He said funding for public investment will likely see delays as the government struggles to push forward its policies due to the political standstill. Wu estimates GDP has contracted at -1.4% in 2019 and forecasts a shrinkage of -1.3% in 2020 while warning that “downside risks to our forecasts remain substantial as the protests now look likely to continue into 2020.”
This compares with 2018’s expansion of 3%.
Externally, the US-China “phase one” trade deal is a positive for the trade outlook and sentiment, though sluggish global trade will continue to weigh on Hong Kong’s external demand.
Barclays economists forecast growth rates of -1.3% for 2019 and 0% for 2020 before turning positive at 1% in 2021. They said in a note the Hong Kong dollar is likely to continue pricing in a higher risk premium amid the intensifying unrest and weakening prospects for the Hong Kong economy and local markets.
The Hong Kong dollar, which is pegged to the US dollar, is permitted to move between 7.75 and 7.85 to the greenback. The Hong Kong Monetary Authority (HKMA) says “under the strong-side Convertibility Undertaking, the HKMA undertakes to buy US dollars from licensed banks at 7.75. Under the weak-side Convertibility Undertaking, the HKMA undertakes to sell US dollars at 7.85.”
“Over the medium term, we would expect it to move towards the middle of the convertibility undertaking at 7.80 given its relationship with Hong Kong-US rate differentials,” the Barclays note said while noting the HIBOR (Hong Kong Interbank Offered Rate) would remain relatively elevated and volatile given underlying liquidity tightness.
While the benchmark HIBOR is expected to ease in 2020, Oxford’s Wu says levels will be higher than those prevailing before 2018.
“But given that interbank liquidity (as measured by the aggregate balance) has shrunk from over HK$400 billion in 2015 to just HK$54 billion at present, Hong Kong’s banks are likely to have fewer incentives to keep interest rates especially low, and hence the HK-US interest rate spread will likely be closed in a more persistent manner,” he said.
Financial Secretary Paul Chan said the city’s budget deficit in this financial year, the first in 15 years, is imposing financial restrictions on the government.
“This also made the government accounts “see the red” for the first time in 15 years, which means that the government’s flexibility in mobilizing financial resources will decline in the economic downturn.”
He said if the business environment continues to be difficult and the unemployment rate is rising, it will further crack down on the weak consumer market and increase the living pressure of wage earners. In order to alleviate the “pain” caused by the economic downturn to mall and medium-sized enterprises and citizens, the budget released in February will focus on “supporting enterprises, protecting employment, boosting the economy, and alleviating the plight of the people.”