Hong Kong’s economy likely contracted again on global headwinds

Published Mon, Oct 31, 2022 · 10:29 AM

HONG KONG’S economy likely contracted for the third quarter in a row as the financial hub’s recovery is stymied by weak global demand and a slow reopening from years of pandemic isolation.

Gross domestic product (GDP) is projected to have dropped 0.8 per cent in the July-to-September period from a year earlier, according to the median estimate in a Bloomberg survey. That wouldn’t be as steep as the second quarter’s 1.3 per cent decline, but it would still mark the third consecutive quarter of contraction.

The government will release advance GDP estimates Monday (Oct 31) afternoon.

“The sequential recovery in consumption amid reopening as well as the robust government expenditure boosted the overall momentum,” Bank of America economists said. “However, with trade volume continuing to contract and rising rates weighing on investment, we believe the pace of recovery will remain gradual.”

The city’s economy has been under strain for months from rising global inflation, a slowdown in China due to Covid Zero, and a talent exodus from more than two years of local virus restrictions and political turmoil. Tightening monetary policy - the city has followed the US Federal Reserve’s interest rate hikes because of the local currency’s peg to the dollar - has also taken a its toll on the city’s growth.

Full-year GDP in Hong Kong is expected to contract for the third time since 2019.

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Chief Executive John Lee announced a raft of measures in his policy address earlier in October aimed at wooing back foreign talent and easing property pressures, but economists and investors have said the proposals fell short of major policy reform. Another pressure point is the city’s budget shortfall, which may triple this year from earlier estimates.

Hong Kong did move towards the end of the third quarter to scrap hotel quarantine, its most substantial step so far to raise the city’s competitiveness as much of the rest of the world has shifted to living with the virus.

“Economic activities gradually normalised with Covid restrictions relaxed under the vaccination pass,” according to Citigroup Inc economists wrote. “While consumption of goods remain weak, services sales should help support overall consumption.”

The government tried to spur retail spending with a round of consumption vouchers last month, though sales volumes have so far struggled to recover. The city’s exports have fallen for five straight months through September, and private sector activity contracted in September for the first time in six months.

The last three months of the year may see a stronger recovery, as they’ll more fully account for the effects of the end of hotel quarantine. The city is also hosting some key events this week aimed at signalling Hong Kong is open to the international community again, including a global finance summit, an international fintech event and a rugby tournament.

Even so, some movement curbs on arrivals remain, and Hong Kong has yet to unveil a road map for full reopening of its borders with mainland China and the rest of the world - moves that the business community has said are key to reviving the city’s international status. Without a timetable on lifting remaining Covid curbs, it will be harder to gain ground against rival finance hubs like Singapore in the short-term, Bloomberg Economics said in a note earlier this month. BLOOMBERG

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