Pandemic and Politics Push Hong Kong’s Economy Into Record Slump
(Bloomberg) -- Hong Kong’s economy suffered its worst quarter on record, extending the first recession in a decade as the coronavirus pandemic battered a city already weakened by political unrest.
The economy contracted 8.9% in the first quarter from year-ago levels, according to the government. The decline surpasses the previous record of -8.3% in the third quarter of 1998 and a 7.8% contraction in the first quarter of 2009, the two worst readings in data back to 1974, according to the Census and Statistics Department Hong Kong.
The latest decline also marks the third straight quarterly contraction for Hong Kong, the longest such stretch since the aftermath of the global financial crisis in 2009. The economy started shrinking from the third quarter of last year amid violent street protests and a government crackdown, political factors that remain unresolved.
“Our economic situation is very challenging, we are deep into recession,” Financial Secretary Paul Chan said at a press conference after the data was released. “Globally the epidemic is yet to be put under complete control. That will affect our export, that will also affect international traveling and business investment. Going forward, the second quarter, we believe that even if there is improvement, the improvement will be gradual and small.”
A 10.2% drop in private consumption from a year earlier was a major driver for the contraction, according to the government report. Total exports of goods sank 9.7% in the period, while exports of services plummeted 37.8%. Government spending grew by 8.3% from a year ago.
Assuming the virus crisis improves, Hong Kong will come out of recession gradually toward the end of the year, Chan said. On Sunday, Chan warned of the worst full-year performance on record with a contraction of as much as 7%, after the economy shrank 1.2% last year.
“Economic activities are likely to stay subdued in the near term if the threat of the pandemic continues,” a government spokesman said in the release. “Hong Kong’s near-term economic outlook is subject to very high uncertainties, hinging crucially on the evolving global public health and economic situations.”
Developments in the U.S.-China relationship, geopolitical tensions and global financial market volatility also warrant continued attention, the spokesman said. Revised figures with a more detailed breakdown are due on May 15.
“The Hong Kong economy can’t rely solely on fiscal stimulus to get back to normal,” said Iris Pang, greater China chief economist with ING Bank NV in Hong Kong. “Consumption will continue to be bad in the second quarter, though may not be worse than the first on a quarter-on-quarter basis. That’s due to an extra hit on consumption from violent protests and social distancing measures.”
Even as the city prepares to ease some social distancing measures amid a steady improvement in the local outbreak situation, the hit to global commerce and the threat of renewed anti-government unrest means activity is likely to remain depressed. Unemployment is rising with tourism, retail, transport and other industries decimated.
The extended downturn’s impact can be especially seen across the city’s struggling small and medium-sized businesses, which have borne the brunt of the impact from protests since last year and now the coronavirus.
“Hong Kong has been a risk-taking society relative to starting a business, but the situation going on the last year will create long memories in people’s minds,” said Todd Handcock, chairman of the Canadian Chamber of Commerce. “It’s been a very challenging year for SMEs in Hong Kong. The unfortunate reality is some of these will not survive and others will struggle for a very long time.”
As of December, 340,000 SMEs accounted for more than 98% of all business units and employed some 1.3 million people, or about 45% of the total excluding civil servants, according to government data.
Sentiment among small businesses is sitting near a record low while those reporting a need for credit jumped to an almost four-year high of 8.8%, March government data show.
“If we all fold, the unemployment levels are going to skyrocket in this city,” said Bella Dobie, co-founder and managing director of Hong Kong branding and marketing firm Orijen. The firm has six full-time staff including Dobie and has been in business since 2000. “The economy of Hong Kong has been struggling since the start of the protests and Covid-19 is just a double whammy.”
The government has taken steps to address the looming employment crisis through multiple rounds of stimulus spending, most prominently through an HK$80 billion wage subsidy program that is not expected to begin distribution until June.
Those businesses that do survive will likely emerge with smaller, leaner operations, with lasting implications on the wider economy as jobs that once existed may not return. Total employment in the city shrank by a record 3.6% in March.
As of December, the number of job vacancies in the private sector of Hong Kong totaled about 54,000, down 30% from a year ago, according to government data. Vacancies in retail and accommodation and food services plummeted 44% and 65% respectively.
The threat of protests resuming once the virus fades and measures forbidding group gatherings ease could also further extend the pain for businesses and the economy.
“It’s about the huge uncertainty of the city’s future,” said Alicia Garcia Herrero, chief Asia Pacific economist with Natixis SA. “Anybody who lives here understands it, you don’t even know what is going to happen tomorrow.”
©2020 Bloomberg L.P.