HK economy limps into 2020 with fate tied to protests

Hong Kong’s economy ends the year wounded, with the chances for stabilization in 2020 hanging on whether future protests are peaceful or lapse back into violence.

Economists forecast a 1.3% contraction for 2019 and predict year-on-year declines will continue in the first two quarters of 2020.

Yet the unrest has tapered in recent weeks after an electoral win for pro-democracy parties in November, and there’s a chance that the contractions in visitor numbers and retail sales will ease up on a month-to-month basis. Businesses and households can look to the government’s annual budget early next year as a potential source of fresh stimulus and structural support for the economy.

Also, the preliminary trade deal reached between the U.S. and China could ease economic pressures for Hong Kong.

Here is a snapshot of the economic pain Hong Kong’s economy has weathered since last spring, from the political unrest as well as the effects of the trade war:

Technical recession

Hong Kong’s economic momentum has evaporated since the start of protests in June, with the city in the third quarter entering its first recession in a decade. The government forecasts an annual contraction of 1.3% amid the protests and as the U.S.-China trade woes take a toll on exports.

Labor market

starting to crack

The labor market has begun losing its resilience, with overall unemployment rising to 3.1% in October after spending much of the past year at a two-decade low. The jobless rate for the food and beverage sector hit the highest level in more than six years. Many businesses have cut hours or required staff to take unpaid leave to stave off layoffs. The November reading is due this afternoon.

Retail catastrophe

The economic impact of the unrest has been illustrated most dramatically in the retail and tourism industries with many businesses hanging on by a thread. More than 5,600 retail jobs could be lost and thousands of stores shuttered in the next six months unless conditions improve, the Hong Kong Retail Management Association said in a briefing. The holiday shopping season will be crucial for many as leases start coming up for renewal and bonuses have to be paid.

Tourists staying away

Mainland Chinese tourists are staying away from Hong Kong amid the unrest, which has had an anti-China tone. Arrivals from China plunged a record 46% in October to slightly more than 2.5 million, less than half of the record set in January. This trend will likely continue as mainland visitors account for about 75% of total arrivals each month and aren’t expected to rebound, especially if the unrest drags on.

Business outlook

at 2003 lows

The outlook for businesses is at its lowest point since 2003, according to the November reading for Hong Kong’s purchasing managers’ index, from IHS Markit. The gauge has slid below the 50 level that divides expansion and contraction since April 2018.

Minor property slide

One segment that has remained strong is the real estate market. Property prices have held up compared with other parts of Hong Kong’s economy, easing 6% from a record set at the end of June. Loosened mortgage rules introduced by the government have allowed more first-time home buyers to enter the market, while demand for living space is solid.

“As long as the protests are peaceful, hopefully the violence is now settled down,” Allan Zeman, chairman of Lan Kwai Fong Holdings Ltd., said in an interview. “I’m hoping that in general, the worst is over.” DB/Bloomberg