Economists predict deeper contraction in HK

Local | 31 Jul 2020 10:28 am

Several economists have downgraded their economic forecasts for Hong Kong as thecity experiences another wave of  coronavirus infections, CNBC reports.

On Wednesday, advance estimates showed the  economy shrank by 9 percent in the second quarter compared with a year ago. That is the city’s fourth consecutive quarter of year-on-year contraction, according to official data.

The government said in a statement that the pandemic remains “a key threat” to the global economy and a renewed outbreak locally “clouded the near-term outlook for domestic economic activity.”

“Nonetheless, once the local epidemic is contained again and external environment continues to improve, the Hong Kong economy hopefully will gradually recover in the rest of the year,” it added.

Economists agreed that stricter social-distancing measures imposed after a recent flare up in cases will dampen any economic momentum. But some don’t share the government’s view that a recovery could come this year.  

Economists at consultancy Capital Economics forecast an 8 percent contraction in the Hong Kong economy this year — close to doubling their previous projection of a 4.5 percent contraction.

Capital Economics’ latest downward revision is also worse than the government’s official forecast for a 4 percent to 7 percent contraction in 2020.

“Until a few weeks ago, Hong Kong’s economy looked set to start recovering this quarter,” the economists said in a Wednesday note, pointing to the public cash handouts of HK$10,000 (US$1,290) that looked set to help lift economic activity after being disbursed earlier this month. 

But the stricter containment measures could “postpone the recovery in consumption, and put additional pressure on employment and incomes, dampening the boost from the government cash handouts,” they added.

In addition to Capital Economics, Citi also downgraded its forecast for Hong Kong and predicted a full-year economic contraction of 6.3 percent compared with 5.5 percent previously.

Iris Pang, chief economist for Greater China at Dutch bank ING, expects the new social-distancing measures to stay in place for some time as the previous relaxation of restrictions might have contributed to the latest jump in cases.

In a note Wednesday, Pang said she is expecting the Hong Kong economy to shrink by 10 percent in the third quarter and 5 percent in the fourth quarter — bringing the full-year contraction to 8.3 percent.

“Coronavirus cases have increased in Hong Kong, and there could be many sources that are hard to trace,” she said. “The government has tightened further social distancing measures again since the outbreak, which the health department claimed could be due to the previous relaxation of social distancing measures.”

But some economists said Hong Kong’s weak economic performance last year could help the city post better gross domestic product numbers in the second half of this year.

The economy contracted in the third and fourth quarters of last year, weighed down by the U.S.-China trade war and social unrest.

Gary Ng, an economist at French investment bank Natixis, told CNBC’s Squawk Box Asia on Thursday that the economy could “pick up” from the second quarter to register a contraction of 5 percent to 6 percent in the second half of 2020. That would bring the full-year contraction to around 7 percent, he added.

“In the second half of the year, I do expect that more fiscal measures targeting industries — especially retail, catering, accommodation as well as construction — need to be implemented,” he said, explaining that those sectors are a “key driver of the current escalated unemployment rate.”   

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