Hong Kong Crashes Into Recession as Protests Hit Economy
The city’s economy has shown the faintest of positive glimmers since the protests’ initial impact this summer.
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Hong Kong’s economy contracted sharply in the third quarter as it entered a recession, exceeding economists’ worst estimates of the damage from nearly five months of protests.
Third-quarter gross domestic product retreated 3.2% from the previous three months, after a 0.4% contraction in the second quarter. That’s the worst slump since 2009, in the aftermath of the global financial crisis. Two consecutive periods of negative growth mean Hong Kong has fallen into a technical recession.
The economic debate now is focused on how long the downturn will last, if recent glimmers of stabilization point to a bottom, and if the U.S.-China trade war and the demonstrations have done lasting damage. Financial Secretary Paul Chan said this week that a full-year economic contraction is “very likely.”
“It’s completely driven by social events, and this is something the government needs to consider,” said Raymond Yeung, chief Greater China economist with Australia & New Zealand Banking Group Ltd. “It’s obviously comparable to the global financial crisis. We have a very similar situation that we don’t know when it’s going to end.”
Further Details from the Release
- Compared to the same period a year earlier, GDP contracted 2.9% versus the median estimate of -0.3%
- Hong Kong’s economy is “very likely to record a negative growth for 2019 as a whole”
- The data are a preliminary assessment; revised 3Q GDP figures will be released on Nov. 15
The Hong Kong Monetary Authority cut its benchmark interest rate Thursday, in line with the city’s currency peg to the dollar following the U.S. Federal Reserve’s reduction in borrowing costs. The move is unlikely to have much bearing on the local cost of borrowing, as lenders don’t necessarily pass on the rate to the public.
The city hasn’t seen significant capital outflow amid the unrest, HKMA Chief Executive Eddie Yue said at a briefing. The Hong Kong dollar rate, deposit level and exchange rate are broadly stable, he said.
The city’s economy has shown the faintest of positive glimmers since the protests’ initial impact this summer, when tourists began staying away. Small business sentiment has ticked higher, as has a gauge of the outlook among purchasing managers, though both remain close to their record lows. The real estate and financial services sectors have remained fairly resilient.
The MSCI Hong Kong Index tumbled as much as 18% from an April high, before recently clawing back some gains in October as relative calm descended on financial markets; the index remains positive for 2019. While property prices have slipped about 5.5% since June, the Centaline Property Centa-City Leading Index is up for the year, hanging on to gains after a February low.
HSBC Holdings Plc, the largest lender in the finance hub, said adjusted pretax profit fell 12% to $5.3 billion for the third quarter. Looking just at its Hong Kong operation, adjusted pretax profit inched up 1% in the quarter to $3 billion and executives said there hasn’t yet been a significant outflow of funds. Standard Chartered Plc also said it earned more in Hong Kong.
| What Bloomberg’s Economists Say... |
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“We don’t see signs of a turnaround in Hong Kong’s economy any time soon as the factors undercutting growth persist. While the government’s relief measures and loose monetary policy could offer some support, it would take time for tourists to return, shoppers to loosen purse strings, and global trade tensions to dissipate.” -- Qian Wan, Bloomberg Economics For the full note click here |
Hong Kong’s Monetary Authority has sought to maintain stability in the city’s financial markets. The Hong Kong dollar’s peg to the greenback isn’t likely in jeopardy despite the slowdown, said Jonathan Ostry, deputy director of the research department with the International Monetary Fund.
“That peg has survived over many decades and has been an important anchor for Hong Kong and its economy,” Ostry told reporters.
One of the biggest factors in determining if Hong Kong will recover -- and how soon -- is whether mainland Chinese tourists scared away by the protests will return. In the aftermath of the 2003 SARS epidemic, they came back, though it may be different this time given the demonstrations’ anti-China tone.
Tourism from the mainland, which hit a record of more than 5.5 million visitor arrivals from China in January, had plummeted to half that by end-August. Mainland visitors still account for almost 80% of total arrivals in Hong Kong.
Chief Executive Carrie Lam said Wednesday that visitor arrivals in the first half of October were down about 50% on-year.
Economists say it’s unlikely this recession will be just a mild dip, with the protests showing no signs of ending and the U.S. and China still negotiating over their trade differences.
“It seems that it is extremely difficult to achieve the forecast” of 0%-1% growth for the year, and GDP may very well decline in 2019, Paul Chan said in a blog post Sunday. The protests’ “blow to our economy is comprehensive.”
“Hong Kong has experienced a very marked slowdown,” the IMF’s Ostry said. “We expect only a modest pick up in growth for 2020 with the risks I would say skewed to the downside, reflecting the possibility of protracted social unrest as well as a continued slowdown in China and in global trade.”
The Hong Kong government has announced relief packages this year, but for most struggling businesses the best cure would be an end to the protests -- especially as Hong Kong has little to no influence over the trade war.
“It’s absolutely life and death for us,” Douglas Young, co-founder of lifestyle and fashion retail chain Goods of Desire, said in an interview with Bloomberg Television. His firm is doing what it can to avoid layoffs, including unpaid leave, voluntary holidays and other ways to make the business more efficient, he said.
“If it ends with decent compromises between all the parties involved, I can see Hong Kong rebounding very quickly,” Young said. “Not within my lifetime have I experienced something this serious. I’m very confident Hong Kong will bounce back, but the crucial thing is: When is this going to end?”
--With assistance from Rishaad Salamat.
To contact the reporters on this story: Eric Lam in Hong Kong at elam87@bloomberg.net;Enda Curran in hong kong at ecurran8@bloomberg.net
To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger
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