Via Financial Times

Hong Kong’s economy has been hit hard by months of anti-government protests, as demonstrators battle police on the streets, schools and businesses have been forced to shut for days at a time and transport has been disrupted.

Tourists, whose dollars are an economic mainstay for the city, have stayed away. US-China trade tensions have taken their toll and many analysts predict the economic malaise will worsen. The government has forecast the city will experience its first annual recession since the global financial crisis in 2009. 

The protests shows little sign of abating, with pro-democracy parties winning a landslide in local elections last Sunday — seen as evidence of broad support for the protest movement and a repudiation of the handling of the months-long political crisis by the government and Beijing.

Protests weigh on growth

In the third quarter, Hong Kong fell into a recession for the first time in a decade. The contraction is expected to worsen in the final quarter of the year, according to Iris Pang, an economist at ING. 

Hong Kong is now forecast to have the sharpest growth slowdown of any advanced economy this year.

Tommy Wu, a senior economist at Oxford Economics, said: “Hong Kong’s economy continues to get hit by the double whammy of domestic political turmoil and US-China trade tensions.”

Column chart of Annual % change showing Hong Kong's GDP falling at fastest pace since the financial crisis

Tourists stay away

International visitors are hugely important to Hong Kong, a city with a large overseas population. Last year, 28m people visited the city of 7.4m, according to World Bank data. 

The value of Hong Kong goods and services exports — which includes tourism spending — is nearly double that of its gross domestic product, a ratio that is second only to that of Luxembourg. 

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This makes the economy particularly vulnerable to a slowdown in visitors.

In the three months to September, tourism arrivals in Hong Kong fell by 26 per cent compared with the same period last year, the second-largest drop since records began in the early 1990s.

Column chart of Annual change in visitor numbers (millions) showing Mainland Chinese travellers have stoppped going to Hong Kong

Chinese arrivals usually account for 70 per cent of visitors to Hong Kong, but their numbers fell by 29 per cent over the same period. The hotel occupancy rate dropped to 63 per cent in September, a decade low according to data from the Hong Kong tourism board. 

Line chart of  showing Hong Kong's hotel occupancy rate has plunged (% of rooms)

Retail sales plunge

Hong Kong is the largest market in the world for luxury Swiss watches — but in October the value of Swiss watch exports to Hong Kong dropped 30 per cent, compared with the same month in the previous year, to about £150m. 

Bar chart of Annual % change in October, top markets showing Exports of Swiss watches to Hong Kong have collapsed

Driven by a sharp fall in sales of luxury goods, Hong Kong’s retail sales fell in August at the fastest pace since records began in 1982. 

Steven Burke, an economist at Focus Economics, said: “Looking ahead to 2020, continued civil unrest will probably keep spending at major shopping centres and inbound tourism downbeat and, in turn, batter private consumption.” 

Line chart of  showing Retail sales have plummeted in Hong Kong (annual % change in volume)

Trade war casts a long shadow

Hong Kong’s goods exports — which mostly consist of re-exported goods from China — have also been hit by US-China trade tensions and the weakening global outlook.

In the three months to October, imports fell 11 per cent compared with the same period last year, while exports contracted by 8 per cent. 

Exports to China, which account for nearly half of the territory’s exports, fell 5 per cent in September compared with the same month in 2018. Hong Kong’s exports to the US, its second-largest trade partner, fared even worse. They were down 24 per cent in the same month. 

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“We expect export momentum to stay weak in 2019 and 2020, damped by a slowdown in global demand and the US-China trade tensions,” said Mr Wu at Oxford Economics. 

“While the recent mini-deal between China and the US, which delayed additional US tariffs planned to be implemented in October, may provide some relief after the trade war escalated dramatically in August, much uncertainty remains and we do not expect tariffs will be rolled back soon,” he added.

Line chart of Annual change in rolling three-month average (%) showing Hong Kong's goods trade has contracted

Forecasts remain bleak

The Hong Kong government has offered tax concessions and subsidies to help businesses weather the crisis but that is not expected to have “a meaningful impact until the political unrest eventually comes to a halt”, said Mr Wu.

Economists are increasingly gloomy about the territory’s outlook, with average growth forecasts for next year revised down to 0.7 per cent in November compared with earlier forecasts of 2.4 per cent according to Consensus Economics, a company that tracks economic projections.

Even this is likely to prove optimistic, some analysts say. Mr Wu forecasts Hong Kong GDP will fall by 1.4 per cent this year, followed by another contraction of 1.3 per cent in 2020. 

“The downside risk to the fourth quarter and this year’s growth forecasts is high,” he said. 

Line chart of Annual % change by date of forecast showing Economists have downgraded Hong Kong's growth forecast for 2020
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