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2020 Hong Kong Economic Outlook

The Hong Kong's economy was hit by both internal factors and external shocks in 2019, leading to the first negative growth in ten years. The social unrest arising from the Extradition bill was regarded as the major cause for the economic downturn with a severe blow to the labor market. For 2020, the global economic growth and trade performance are expected to improve. The conclusion of China-US phase one trade deal and the clearer development in Brexit would boost investors’ expectations. And a greater emphasis is placed on stabilizing growth in China to stimulate the economy from bottoming up. But, the social unrest from the Extradition bill will continue to be the major headwind for economic development in Hong Kong. The Hong Kong economy is forecast to rebound slightly in 2020 with annual GDP growth at around 1%.

1. 2019 Economic Review

In 2019, the Hong Kong economy suffered a severe downturn as a result from both internal factors and external shock and illustrated the following five important characteristics:

First, the overall economy entered a recession again after ten years. The Hong Kong economy has been heading into a downward trend since the beginning of 2019. Economic performance has declined quarter by quarter. The year-over-year GDP growth in the first half dropped sharply to 0.5% from 4.1% in a year ago. The yearly growth in Q3 even dropped to negative 2.9%, which was a severe deterioration from the first half and led to negative 0.7% growth for the first three quarters in 2019. Given that the seasonally adjusted real GDP contracted by 0.5% in Q2 and 3.2% in Q3 on a quarterly basis, the Hong Kong economy has entered a technical recession. The economic performance in Q4 is likely to worsen with a full-year GDP growth estimated to contract by 1.0-1.5%. It will be the first recession since the global financial crisis in 2009 as well as the fifth economic recession in Hong Kong based on available GDP data.

Second, the social unrest arising from the Extradition bill was the major cause for the economic downturn. Different from previous recessions, the current recession is mainly triggered by internal factors. The social unrest lasted for more than 6 months, causing significant damages to the tourism industry. Services export thus dropped substantially. Domestic consumption and investment spending also weakened. These dealt a huge blow to the Hong Kong economy, as it had already suffered from the slowing global economic growth and the escalation of China-US trade tensions. Visitor arrivals to Hong Kong were down by 39.1%, 34.2% and 43.7% in Aug, Sep and Oct, bringing unprecedented pressures for the accommodation, catering and retail sectors. In Oct, retail sales in Hong Kong dropped by 24.3%, the biggest slump on record. As a result, private consumption expenditure in Q3 fell by 3.4%. Gross domestic fixed capital formation also slipped by 16.3%, which was the lowest in ten years. Overall, the social unrest was estimated to drag down the Hong Kong GDP growth by 2.1%, being the main cause for the economic downturn.

Third, the global slowdown and trade tensions affected Hong Kong’s external demand. From the perspective of external shocks, the global economic downturn and China-US trade tensions continued to depress Hong Kong’s external demand. In the first nine months, export of goods was down by 5.4% in real terms and export of services was down by 4.7% in real terms. In Q3 alone, export of services fell by 13.8% in real terms, which was even worse than those of Asian financial crisis and global financial crisis. Merchandise export in Oct dropped by 9.2% year-over-year, a larger decline than the previous nine months. The WTO predicted that global trade this year still managed to attain 1.2% growth, which suggested that the impacts of China-US trade tensions on Hong Kong were far greater than the global average.

Fourth, financial markets operated smoothly with relatively mild impacts seen. The financial system and markets in Hong Kong maintained effective operation. The short-term interest rates on HKD stayed steady. The Linked Exchange Rate System operated in a smooth and orderly manner. The HKD exchange rate did not touch the 7.85 weak side convertibility level, indicating the market confidence on the HKD and Hong Kong financial markets. Asset markets were broadly stable. The financial system in Hong Kong remained very solid. Impacts from the social unrest included disruptions in banking services due to attack on bank branches; downgrade on credit rating and outlook by rating agencies which affected Hong Kong’s image as a global financial center; and fever businesses for the financial industry from lower bank deposits as well as contraction in tourism and retail sectors.

Fifth, unemployment rate surged rapidly amid the significant pressure on the labor market. The unemployment rate in Hong Kong was kept steady at 2.8% between Q4 2018 and the first half of 2019. Since then, it began to rise and reached 3.2% for Sep to Nov, which was the highest from Q3 2017. Total employed persons decreased from 3.8726 million at the end of 2018 to 3.8306 million at Sep-Nov 2019, a decrease of 42,000. In the last two years, there was an increase of 3,363 employed persons each month. Thus, it is estimated that the economic downturn affected more than 75,000 jobs in the first 10 months of 2019. It is worth noting that unemployment rate in Hong Kong was only up slightly by 0.4%. In addition to the fact that unemployment rate was a lagging indicator, an important reason for slower rise for unemployment rate is that many people exited the labor market recently, cutting the labor force by around 30,000. Otherwise, unemployment rate in Hong Kong could be at around 4% level.

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Content provided by Bank of China (Hong Kong)
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