HONG KONG MIRED IN LONGEST RECESSION SINCE 2009
Hong Kong entered its current recession in H2 2019, when the knock-on effect of sociopolitical unrest saw the city’s GDP growth fall to -0.5% y-o-y in Q3 2019 and -1.2% y-o-y in Q4 2019.
The pandemic accelerated the decline in GDP through 2020. By the end of Q3 2020, Hong Kong had seen five consecutive quarters of negative y-o-y GDP growth. This downturn is the longest since 2009 and is already on par with the 1998/1999 recession in terms of duration.
Despite assistance from the Employment Support Scheme, which forms part of the government’s HK$311-billion Anti-epidemic Fund (equivalent to circa 11% of Hong Kong’s GDP in 2019), the city’s unemployment rate climbed from 3.4% at the end of 2019 to 6.6% as at end of 2020, a level last seen in 2004. Unemployment in the retail, F&B and hospitality sectors rose to 10.6% over the same period, the highest amongst all major employer categories.
The inbound tourism and retail-related sectors have been seriously impacted by travel bans and mandatory social-distancing measures. Since February 2019, retail sales have fallen on a y-o-y basis for 22 consecutive months, 16 of which featured double-digit percentage declines. Aside from supermarkets, which saw 9.5% y-o-y growth, all other retail categories ended the first eleven months of 2020 with negative sales growth.
Trade has been relatively resilient compared to other sectors. Aggregate trade slid by only 3.9% y-o-y in the first eleven months of 2020, with only two months registering double-digit declines during the same period. Total trade with the U.S. and India experienced the sharpest declines, but trade with China fell by just 2.1% y-o-y over the same period.
The global and local economic downturn failed to deter capital from flowing into Hong Kong in 2020. The upbeat IPO market helped Hong Kong’s aggregate balance surge 8.4-fold over the year to an all-time high of HK$457 billion. Total funds raised via the Hong Kong Stock Exchange increased by 64% y-o-y in 2020, reflecting global investors’ confidence in the city’s financial market.
Resilient demand ensured the unemployment rate in the finance, insurance, real estate and professional services industries remained relatively low at 4.3%, two-ppt higher than the level at end-2019.
ECONOMY SET TO RECORD STEADY RECOVERY FROM LOW BASE
Hong Kong’s economic recovery requires the full resumption of cross-border travel: a scenario only possible if COVID-19 is completely eradicated within the city. Hong Kong’s economic fortunes will also depend on U.S.-China relations, which will have a ripple effect on China’s demand for local goods and services.
Nevertheless, a low-base effect will almost certainly ensure the economy registers y-o-y growth in 2021. However, corporates are expected to remain cost-cautious until there is solid evidence of genuine and sustainable business growth.
The expiry of the Employment Support Scheme will likely push up the unemployment rate in Q1 2021, with the retail and tourism sectors bearing the brunt of job losses. While discretionary spending is set to remain subdued, total retail sales growth will increase, again due to a low base effect.
Global trade is expected to see a steady recovery in 2021, supported by strong growth in China and western economies’ gradual emergence from lockdown. However, any further trade disputes between China and the U.S. could affect Hong Kong’s trade flows and negatively impact logistics demand.
Tighter listing rules in the U.S. will encourage more Chinese enterprises to repatriate and meet their fund-raising needs in Hong Kong. Investment banks, law firms and professional services firms will all benefit from the strong IPO pipeline, with Chinese firms set to become more prominent in the years ahead. An end to widespread sociopolitical unrest has also instilled greater confidence in Chinese corporates and investors looking to expand their portfolios in Hong Kong.
Quantitative easing across the world’s major economies will ensure global liquidity remains higher for longer. Hong Kong’s peg to the U.S. Dollar will mean interest rates stay low for another two to three years, mirroring the situation in the U.S. The large volume and cheap cost of capital will continue to benefit Hong Kong’s asset markets.
While Hong Kong is almost certain to see GDP growth return to positive territory this year, the prolonged pandemic, lack of cross-border visitors and geopolitical risks will all continue to drag on growth.