HONG KONG — New data has confirmed that months of anti-government protests have tipped the economy of Hong Kong, already under pressure from China’s slowdown and its trade conflict with the U.S., into recession.
The city’s economy shrank 3.2% in the July-September period compared with the quarter before, according to figures from the Hong Kong Census and Statistics Department on Thursday. This marked a stark deterioration from the second quarter’s 0.4% decline in gross domestic product and puts the city officially in recession for the first time in a decade
“The increasingly violent reality since June is hurting Hong Kong’s economy,” Chief Executive Carrie Lam said in a speech on Wednesday, a day after noting that output for the year is also likely to contract.
Indeed, the third-quarter contraction means overall economic output between January and September dropped 0.7% from the 2018 level. Investment, private consumption and exports of goods and services are all on the decline.
“It is a distressing time for Hong Kong trade and business,” Lam said. “The continuing unrest has crippled our retail trade as well as catering, transport and numerous other businesses associated with the tourism industry.”
Chow Tai Fook Jewellery Group, the city’s largest jewelry retail chain, saw its sales in the city and Macao fall 35% during the third compared with a year before. Prime location store rents in Hong Kong meanwhile fell 10.5% compared with the previous quarter, the biggest plunge in 21 years, according to real estate services company CBRE.
Cathay Pacific Airways, the city’s flag carrier, saw inbound passenger traffic plummet 38% in September. Hotel room occupancy tumbled to 63% for the month from 86% a year earlier while average nightly rates slid 22.5%, according to Hong Kong Tourism Board data released Thursday.
Unemployment among restaurant and bar workers has reached a six-year high of 6%, according to government data. Many businesses have asked staff to take unpaid leave as tourists cancel visits and shops and malls close early in the face of clashes between demonstrators and police and shutdowns by the MTR, the city’s subway operator. The Hong Kong Tourism Board said Thursday that visitation to the city fell 34.2% from a year earlier.
Overall, nearly twice as many companies expect business to worsen during the current quarter compared with three months ago, according to a regular government survey of 540 local companies.
The protests are not the only culprit though. Hong Kong’s traditional logistics and trading sectors were already wrestling with fallout from the U.S.-China standoff. Neighboring Macao, which has suppressed attempted protests, entered recession a quarter earlier. Hong Kong officials originally projected the city’s GDP would rise 2% to 3% this year.
Under pressure to respond to the widening distress, Lam’s administration has come out with a series of business aid packages including tax breaks and subsidies.
“I have been impressing upon my colleagues that we are facing some exceptional times that call for exceptional responses,” Lam said in comments to the city’s chambers of commerce on Thursday. “If we still act exactly in the same conventional mode as if business is as usual, life is normal, then we are not being very responsible.”
The government’s small business support measures add up to more than 20 billion Hong Kong dollars ($2.55 billion), according to Lam.
For its part, the Hong Kong Monetary Authority has reduced required capital buffers for banks in the city, expressing hope this can free up to HK$300 billion in new credit for small businesses. It also cut its benchmark interest rate by a quarter of a percentage point on Thursday morning, following the overnight move by the U.S. Federal Reserve.
Few expect such measures to be sufficient to end the Hong Kong’s recession.
“They may help cushion against a severe contraction by relieving some pressures on businesses and encouraging companies to keep their employees and reduce layoffs,” said Tommy Wu, senior economist at research company Oxford Economics, in a recent report. “But given how poor sentiment is, we expect the economy to remain weak even after the imposition of the short-term stimulus measures.”
Wu and others are skeptical mainland tourists will start making their way back to Hong Kong. “The allure of Hong Kong as a destination has deteriorated in the eyes of the mainland public following the unrest and anti-mainland vandalism and violence,” he said.
Looser credit will also have limited impact, according to Sonny Hsu, senior credit officer for financial institutions at Moody’s Investors Service. “In this environment, we think demand for loans is naturally lower when we have lower economic growth.”
While there is cautious optimism the economy may return to growth next year, economists are hedging their forecasts.
Helen Qiao and Miao Ouyang of Bank of America wrote this month that their base case scenario is for GDP to edge up 0.4% in 2020. However, they added, “Given the recent escalated instability, we caution that risks have tilted to our bear-case scenario” of a further 1.8% contraction.
“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,” said Julian Evans-Pritchard, senior China economist at research company Capital Economics in a note Thursday.
Additional reporting by Nikki Sun and Narayanan Somasundaram