Hong Kong's first recession since 2009 is worse than feared

Violent anti-government protests and global trade tensions shattered consumer and business confidence in the city.

    Widespread protests in the city of Hong Kong have badly affected tourism and business activity, leading to an economic contraction that was larger than most analysts expected [October 20: Tyrone Siu/Reuters]
    Widespread protests in the city of Hong Kong have badly affected tourism and business activity, leading to an economic contraction that was larger than most analysts expected [October 20: Tyrone Siu/Reuters]

    Prolonged city-wide protests plunged Hong Kong into its first recession since the global financial crisis, as economic growth shrank more than expected between July and September, latest government figures show.

    Compared with the previous three months, the gross domestic product (GDP) - the total of all the finished goods and services produced in an economy - sank 3.2 percent in the third quarter of 2019.

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    The economy had shrunk by 0.4 percent in the second quarter. Economists define a recession as two consecutive quarters of shrinkage in the GDP.

    The latest figure was also much worse than analysts had predicted. They were forecasting a contraction of less than one percent.,

    It is a sign that the anti-government protests, which are now in their fifth month, and the trade war between the United States and China, are taking a heavy toll on the city's economy.

    "Domestic demand worsened significantly," the government said in a statement.

    "As the weakening economic conditions dampened consumer sentiment and large-scale demonstrations cause severe disruptions to the retail, catering and other consumer-related sectors, private consumption expenditure recorded its first year-on-year decline in more than 10 years."

    Iris Pang, an economist at Dutch bank ING for Greater China told Al Jazeera that the protests played a bigger part in the contraction than the trade war did.

    Violence on Hong Kong's streets has not only scared big-spending mainland Chinese tourists away, but also disrupted the travel patterns of Hong Kong residents who do not want to be stuck on the streets during protests, she said.

    "There is more domestic consumption of necessities, but not of other things like at restaurants and department stores. Some people are being fired as a result," Hong Kong-based Pang said.

    As a result, a "domino effect" and "downward spiral" have affected small and medium enterprises (SMEs) and tourism-related businesses in Hong Kong, leading to a rise in unemployment, she added.

    Hong Kong's unemployment rate ticked higher to 2.9 percent in the May-to-July period, the highest in about two years, and has stayed at that level since. 

    According to the latest figures, net investment dropped 16.3 percent compared with a 10.8 percent decrease in the second quarter of 2019, while exports and imports also recorded declines that were larger than those of the previous three months.

    "Going forward, the negativity should come off a bit because of the low base," Jeff Ng, managing director of research firm Continuum Economics in Singapore, told Al Jazeera, referring to an effect caused by large, sudden changes in economic data.

    But the unfavourable conditions are likely to persist, cementing the case for a full year of negative economic growth, Ng said.

    The government also warned of a year of lost growth.

    "Considering ... the lack of any signs of improvement in the near term, the economy is very likely to record a negative growth for 2019 as a whole," the government said.

    Capital Economics said in a research note that while the GDP would probably continue to contract in the fourth quarter, the pace of contraction should ease somewhat barring a further escalation in the demonstrations.

    "Any recovery will be constrained by weak business investment, however, as the city's political crisis has done lasting damage to its reputation as a stable and autonomous financial hub," it said.

    Stimulus potential

    The sharper-than-expected slowdown raises the question of how long Hong Kong's economy will sputter along.

    "All the establishment surveys in recent months indicated that local business sentiment has turned very pessimistic," the government said.

    If violence persists throughout 2020, the city's economy could contract by as 5.8 percent yearly, ING's Pang warned. She has lowered her GDP forecast for 2019 to a negative growth of 1.7 percent.

    This could prompt short-term stimulus measures from the Hong Kong government aimed at struggling retailers and the unemployed.

    "The financial secretary could announce stimulus measures, such as subsidies and tax holidays, to help SMEs and those in the catering and tourism sectors," Pang said.

    Temporary unemployment benefits and retraining programmes could also help those who have been laid off due to weak business activity, she added.

    But as protesters remain undeterred in demanding greater political freedoms, monetary handouts might not be enough to return the economy to health.

    Embattled Hong Kong Chief Executive Carrie Lam has already proposed widespread changes to the city's housing policies, which include boosting the construction of public housing and easing financing rules for first-time homeowners.

    "But these need time to come into effect. It also needs some structural stability to work," Ng said.

    SOURCE: Al Jazeera and news agencies