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Risk of Recession


In the blog last week, I mentioned that the economy of Hong Kong is being affected by external threats and local social incidents, weakening the momentum for economic growth.  The situation is worrying.  The recently announced economic statistics further demonstrate and describe the tough situation that we are facing.

The Census and Statistics Department announced last week the Gross Domestic Product (GDP) for the second quarter of 2019.  A year-on-year increase in real terms by 0.6% is recorded, continuing to be the lowest figure in the past decade. Although the year-on-year growth seems to be on par with that in Q1, its shows a negative growth of 0.3% after seasonal adjustment since the quarterly growth is 1.3% from Q4 2018 to Q1 2019. That reveals that the economy has lost its momentum in the second quarter of 2019.

Going into the main components, gross domestic fixed capital formation decreased for three quarters in a row with a year-on-year decrease of 12.1% in real terms in Q2, reflecting negative investment sentiment.  External demands continue to be weak, the year-on-year decrease of total exports of goods accelerated from 3.7% in Q1 to 5.4% in Q2, with a drop of around 10% in June alone.  The drop in total imports even accelerated from 4.2% to 7%.  In fact, conflicts between China and the US on trade and technology have dealt a blow not only to the trade performance of Hong Kong, but also the regional trade and production activities in Asia.  Last Friday, US President Trump announced to impose a 10% tariff on another US$300 billion of Chinese goods starting from 1 September.  Shortly after that, the Mainland authorities indicated that it would take necessary retaliatory measures if such tariffs are implemented by the US.  It is clear that the global economy is facing increasing downside risks, and the impact on Hong Kong will be deepened.

Domestically, private consumption expenditure in last quarter only slightly increased.   Coupled with soft retail figures, the outlook is certainly not promising. The year-on-year decrease of the total turnover of the retail sector accelerated from 1.4% in May to 6.7% in June.  In particular, the drop in large expense items is more significant, with a 17.1% decrease in the value of sales of jewellery, watches and clocks, and luxury gifts in June.  The sales value of electrical goods and other not elsewhere classified consumer durable goods decreased by 16.1%, while that of wearing apparel decreased by 8.2%.

The catering industry also faces grave challenges.  Hong Kong's total restaurant receipts in Q2 is HK$28.7 billion, which amounts to a year-on-year decrease of 0.4%, and a 4.6% drop compared to the last quarter after seasonal adjustment.  This is the worst performance in the past decade, and also the first time that both quantity and price recorded a decrease since 2009.  With high fixed costs such as rent and wages, restaurants will be facing great pressure in their operations.

The continuous violent storming in the past two months has added pressure on the retail sector. Some shops even have to suspend their business intermittently, and people's daily lives and consumption sentiment are affected. The damage of Hong Kong's international image has weakened the desire of business travellers and funds to reach Hong Kong. The number of visitors to Hong Kong also reflected the same.

All the above will impact the overall economy, the operation and capital flow of enterprises (especially SMEs), as well as individuals' income and even employment. If the situation continues, the working population from the middle class and the grassroots with dependent children and elderly would face severe stress of earning a living. According to the Census and Statistics Department, inbound travel activities created more than 220,000 jobs in sectors such as retail, catering and accommodation, while practitioners in the trade and logistics sector exceed 720 000.

Internationally, two credit rating institutions have expressed their concerns about the impact of large-scale public processions and violent protests to Hong Kong.

I hope that public peace and citizens' livelihood will not be affected, and more importantly, law and order of the society will not be damaged while we express our views. Violent storming is gradually eroding the confidence of people and the international community on the future of Hong Kong, and affecting foreign traders' desire to do business and invest in Hong Kong. If the situation persists, the pressure faced by the working population and SMEs would be further intensified, and job security would be threatened. 

Hong Kong's economy recorded a quarter-to-quarter negative growth of 0.3% in the second quarter. If the third quarter continues to reflect a negative growth, Hong Kong will enter a recession technically. In other words, the risk of Hong Kong entering a recession has been growing.

At times of weakened economic momentum, the Government would not contain public expenditure. We will explore and implement measures in a timely manner to serve the counter-cyclical effect. However, such effect will only be limited if we only rely on the  Government's expenditure.  We need concerted effort of the wider community to achieve a better effect. Hong Kong experienced various challenges in the past years, including the Asian financial crisis, the dot-com bubble crash and the SARS epidemic. At the time, cross-sector collaboration and alliance among the Government, citizens and business sectors, as well as the support of Mainland policies, help Hong Kong to ride out economic difficulties and move forward. The storming in the last two months, as well as some upcoming movements would affect the livelihood of people and the cornerstone of Hong Kong's success, giving a hard blow to the economy and the citizens. Would all of us please think twice. 

August 4, 2019