Hong Kong economy expected to shrink 6 to 8 per cent for year, marking first back-to-back annual contractions on record

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Hong Kong’s economy is expected to shrink by between 6 and 8 per cent this year – in what would be the first back-to-back annual contractions since record-keeping began 1961 – as the city grapples with a third wave of coronavirus infections and escalating US-China tensions.

The city’s gross domestic product slumped 9 per cent in the second quarter from the same period a year ago, falling just short of the record 9.1 per cent year-on-year decline for the first three months of 2020.

According to official figures announced on Friday, GDP contracted year on year for the fourth straight quarter, while the economic outlook for July through September also looked grim, with the tourism board reporting that arrivals to the city had slumped to next to nothing compared to last year.

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Hong Kong’s export industry has been caught in the crossfire between Washington and Beijing. Photo: Winson Wong
Hong Kong’s export industry has been caught in the crossfire between Washington and Beijing. Photo: Winson Wong

Friday’s numbers marked the second time this year the government downgraded its annual GDP forecast, following the 4 to 7 per cent contraction predicted in April by financial secretary Paul Chan Mo-po, who warned at the time that the city was facing the threat of its worst recession ever.

Chan’s initial estimate, made in February, foresaw a range of between 0.5 per cent growth and a 1.5 per cent decline.

Since such record-keeping began nearly six decades ago, there have been only three full-year economic contractions: in 1998 (5.9 per cent), 2009 (2.5 per cent) and 2019 (1.2 per cent).

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Government economist Andrew Au Sik-hung on Friday attributed the downgraded forecast to the weak global economy and latest wave of Covid-19 infections, as well as what is likely to remain a complete freeze on inbound tourism for the remainder of the year.

An uneven and bumpy recovery process around the world, he added, would only be exacerbated by growing conflict on the world stage.

“China-US relations and geopolitical tensions also increase uncertainty surrounding the economic outlook,” he said at a press conference.

He added that if the city, which officially slipped into recession in third quarter 2019, could rein in the local public health crisis soon and did not suffer significant deterioration among other external factors, then the full-year decline might be able to hold at between 6 per cent and 7 per cent.

The Hong Kong stock exchange in the city’s Central business district. Photo: Nora Tam
The Hong Kong stock exchange in the city’s Central business district. Photo: Nora Tam

Hong Kong’s export industry has been caught in a crossfire between Washington and Beijing, with goods made in the city for export to the United States requiring a relabelling to “Made in China” after September 25, as part of US President Donald Trump’s executive order suspending special treatment under the Hong Kong Policy Act of 1992.

But Au said the impact would be manageable given that domestic exports to the US accounted for less than 0.1 per cent of the city’s total exports last year.

He noted the global economic focus had also been shifting from the West to the East due to China’s outstanding growth over the past 10 to 20 years, adding its economic activities recently revived after it brought the pandemic under control.

Given its status as “an important financial centre and business centre in China,” those trends meant Hong Kong still had “a lot of opportunities”, he said.

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Chinese University economist Terence Chong Tai-leung agreed the impact of changes to trade arrangements would be limited and might affect only a small number of local producers.

But he also predicted Sino-US trade would continue to decline, something that could reduce re-exports through Hong Kong, though they are not considered one of the city’s primary economic drivers.

As China’s GDP grew 3.2 per cent in the second quarter, Chong said trade between Hong Kong and the mainland might continue to pick up in the second half.

Dennis Ng Wang-pun, president of the Chinese Manufacturers’ Association, meanwhile, lamented the shadow the city’s export business had been operating under for the past two years.

“The consequence is minimal. But what’s next? We don’t know,” Ng said, adding the US move had pushed businesses to focus more on branding development.

Tight border controls in Hong Kong and around the globe due to the ongoing Covid-19 pandemic have brought the city’s once lofty tourist numbers crashing down. Photo: Sam Tsang
Tight border controls in Hong Kong and around the globe due to the ongoing Covid-19 pandemic have brought the city’s once lofty tourist numbers crashing down. Photo: Sam Tsang

“If the brand is successful, then it doesn’t matter where the product is made.”

Worried over the national security law that Beijing imposed on Hong Kong at the end of June, nearly four in 10 US businesses were considering relocating from the city, a poll by the American Chamber of Commerce of 13 per cent of its members found.

Locally, Iris Pang, ING Bank Greater China economist, predicted consumer appetite would remain weak, as people continued to struggle to make ends meet amid a jobless rate now at 6.2 per cent, a more than 15-year high.

Pang expected the pace of a recovery might be slow in the second half of the year, as the local government would be more cautious about relaxing social-distancing measures going forward to avoid potential Covid-19 relapses.

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Simon Wong Ka-wo, president of the Hong Kong Federation of Restaurants and Related Trades, said even the government’s HK$10,000 cash payout scheme, intended to boost consumption, could not help reeling eateries unable to provide dine-in services in the evening.

Wong said when residents ordered takeaway, they typically ordered simple dishes that charged a lower price.

“Residents are tightening their belts,” he said.

Retail sector lawmaker Peter Shiu-Ka-fai added that many businesses were sitting on the edge of a cliff, with landlords who had done little to help in the way of relief measures.

He also believed most residents had put their HK$10,000 allowances in the bank for the moment rather than going out and spending it due to the spike in local cases.

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Au, the government economist, insisted the payout scheme had helped many residents, but conceded consumer sentiment would depend on whether they believed the pandemic was under control.

“If we can control it quickly, then I believe everyone will be more comfortable with spending money,” he said.

One sector where relief measures may not be so helpful is the tourism industry.

Provisional figures released on Friday showed 20,568 people arrived in the city last month, compared with 14,606 in June, a monthly uptick of about 40.8 per cent. The latest statistics represented a daily average of about 660 arrivals.

Over the first seven months of the year, arrivals were down 91.2 per cent, at 3.54 million, from the same period in 2019, the board said.

“The situation is quite helpless,” tourism industry lawmaker Yiu Si-wing said.

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