HK economy seen to rebound as virus curbs ease

SAR's economic outlook for the full 2022 year may seem uncertain, but the gradual reopening of international borders after the COVID-19 pandemic eases is likely to stabilize the local economy in the fourth quarter. 

The Hong Kong Special Administrative Region's economy dived into recession again in the first half of this year as the fifth wave of COVID-19 infections saw exports shrink further, a stalled recovery in private consumption and a continued drop in fixed investments.

But experts say that with the gradual easing of COVID-19 restrictions, Hong Kong's economy may stage a stronger rebound in the last quarter of 2022 and beyond.

The city's gross domestic product declined 1.3 percent in the second quarter of this year after contracting 3.9 percent in the preceding quarter, according to the Census and Statistics Department.

The HKSAR government has cut its own forecast to between minus 0.5 percent and 0.5 percent from its May estimate of 1 to 2 percent. S&P Global Ratings expects the local economy to shrink 0.6 percent this year, while UBS maintains a full-year GDP forecast of 0.2 percent this year.

With the gradual reopening of international borders as the pandemic wanes, economists are upbeat this will be a catalyst for an economic rebound.

"The easing of anti-COVID restrictions is likely to revitalize Hong Kong's economy, supporting a stronger recovery from the fourth quarter," says Stephen Li Kwok-kei, head of global markets for Greater China at Singapore-based United Overseas Bank. He expects Chief Executive John Lee Ka-chiu's first policy address on Oct 19 to outline further measures to help put the economy back to normalcy.

"Significant moves, such as 'border reopening' between Hong Kong and the Chinese mainland and the complete lifting of COVID-19 curbs, will provide a significant boost to economic outlook," says Li. UOB itself expects Hong Kong's economy to contract 0.7 percent this year.

"We're seeing a better economic performance in the second half of the year, partly driven by fiscal stimulus measures and an improved labor market. But we expect a 0.8-percent contraction for the whole year, due largely to the weak economy in the first quarter," says a Hang Seng Bank economic research report.

For any developed economy, domestic consumption is the largest GDP contributor.

There was a silver lining last month when Hong Kong scrapped its mandatory hotel quarantine requirement for people returning to or visiting the SAR from Sept 26. The normalization of international visitor flow should lift business confidence, attract domestic and global investment, and strengthen Hong Kong's status as a world trading and financial center.

But economists argue that scrapping the quarantine rule may not help much in boosting domestic consumption in terms of retail sales and visitor spending.

"Instead, it could present incremental downside risk for local retailers and their landlords as outbound tourism is likely to increase, while the number of inbound travelers could be limited due to the required three-day health monitoring period. Another factor is the continued low visibility for large-scale border normalization with the mainland, considering strict COVID restrictive measures remained in place onshore," explains Angus Chan, head of Hong Kong strategy at UBS Global Research.

"Hong Kong's latest measures are aimed primarily at reviving business travel, while the three-day health surveillance period may still discourage leisure travelers," says Charlotte Man, Daiwa's regional economist.

"Quarantine-free travel may increase more travel and leisure activities, but the possibility of a significant resumption of tourist inflow into Hong Kong seems remote for now with the city's continuing anti-COVID restrictions.

"On the other hand, the sharp depreciation of the Japanese, South Korean and Thai currencies has made these traditional tourist destinations cheaper for Hong Kong travelers," notes BNP Paribas in a strategy report.

The Federation of Hong Kong Industries has urged the SAR government to draw up a roadmap and remove all curbs for visitors to Hong Kong as soon as possible if circumstances permit. This would be critical for revitalizing the local economy and creating the impetus for growth in the tourism and retail industries.

Another key component of domestic consumption is the effect from the transmission of wealth generated by the buoyancy of the asset markets in real-estate and equity trading.

As of Oct 13, the Hong Kong Hang Seng Index had plunged by nearly 30 percent from early this year. The local property market dipped more than 7.5 percent in August from the historical high in September last year, and fell more than 6.2 percent in the first eight months, according to the Rating and Valuation Department.

"The weakening wealth effects from the residential property and stock markets due to interest-rate hikes may have a dampening impact on consumer sentiment," warns CMA President Allen Shi Lop-tak.

Hong Kong's property and stock markets are expected to remain under pressure from soaring US interest rates until year's end amid growing inflation attributed to soaring global energy and food prices, geopolitical crises and supply-chain bottlenecks arising from COVID-19 lockdowns.

Charlotte Man expects the short-term HIBOR (Hong Kong Interbank Offered Rate) to climb to 4.5 percent by the end of this year and to 4.7 percent by late 2023. This would set the foundation for more prime rate hikes as the US Federal Reserve is resolved to tame inflation even at the expense of an economic recession, Man warns.

Hong Kong's private consumption expenditure went up marginally by 0.1 percent in the second quarter of 2022 from a year ago after having dipped 5.8 percent in the first quarter of this year.

Along with weak domestic consumption, overall investment spending in terms of gross domestic fixed capital formation fell 3 percent year-on-year in the second quarter, having narrowed from the 7.8-percent decrease in the preceding quarter.

The exodus of talent and relocation of companies from Hong Kong calls for further easing of anti-COVID-19 measures as soon as possible.

"As an international city and a major conduit between China and the world, Hong Kong needs to align its policies to match with, or surpass those of other superconnectors, such as Singapore, Dubai and London. Travel restrictions should be further relaxed to allow staff of multinational companies, who still believe in Hong Kong's role in the regional economy, to travel freely and welcome their clients and business partners," says ECA International's Asia Regional Director Lee Quane.

Overall business conditions in the SAR's private sector, represented by the S&P Global Hong Kong SAR Purchasing Managers' Index, continued to deteriorate in September due to the COVID-19 disruptions that have sapped business demand and activities.

"External demand and new businesses from the mainland again shrank in August, in line with the declining trend in merchandise exports in recent months. We expect the PMI to fall further as domestic and external demand weakens," says OCBC Bank economist Tommy Xie Dongming.

Hong Kong's third economic growth pillar — the external trade sector — is still bracing for a worsening external environment and continued disruptions to cross-boundary transportation. The city's external merchandise trade continued to dwindle in August as the value of total goods exports and goods imports recorded year-on-year decreases — at 14.3 percent and 16.3 percent, respectively.

"The slowing global economy, skyrocketing global energy prices and growing inflation amid the Russia-Ukraine conflict, interest-rate hikes by central banks and the withdrawal of financial market liquidity, and the intensifying confrontation between China and the United States are not favorable to prospects for our exports sector," says Shi.

He expects Hong Kong's external merchandise trade to continue falling at high single-digit rates for the rest of the year. The situation could improve if travel and transportation between Hong Kong and the mainland are normalized in a timely manner, Shi envisages.

The SAR's total exports of goods plunged 8.6 percent year-on-year in the second quarter this year — widening from a 4.5-percent decline in the previous quarter.

Amid poor consumption and investment sentiment, along with faltering exports, raising government expenditure is the only positive move to buttress the city's economic growth. Government consumption expenditure soared 13 percent year-on-year in the second quarter after having risen 6.7 percent in the previous quarter.

However, Xie is not confident that the SAR government will spend lavishly again to boost the economy. "The weaker-than-expected economic performance has weighed on profits and salaries tax revenue. Stamp duty revenue could also fall short of expectations as turnovers in stock and residential-property transactions have dropped significantly."

Financial Secretary Paul Chan Mo-po predicted in September that the government's fiscal deficit would balloon to more than HK$100 billion ($12.8 billion) this financial year, compared to the original forecast of HK$56.3 billion in the 2022-2023 Budget. If this were to materialize, it would be Hong Kong's second-highest budget deficit following the record HK$232.5 billion deficit recorded in the 2020-21 financial year.

As the government's fiscal reserves may shrink to HK$800 billion by the end of this fiscal year, this may restrict the city's ability to launch more programs to boost the economy. The administration has implemented a raft of counter-cyclical measures worth more than HK$170 billion in the 2022-23 Budget to prop up the COVID-hit economy.