The Hong Kong economy contracted at the sharpest pace on record in the first quarter of 2020 as the Covid-19 pandemic disrupted virtually all types of economic activity in the city. The advance GDP estimate for the first three months of the year shows a year-on-year contraction of 8.9%, worse than during both the Asian Financial Crisis and the Global Financial Crisis, when the city’s economy shrank by 8.1% and 7.5% respectively at their lowest points (Figure 1).
Private consumption, which accounts for roughly 68% of GDP, dropped by 10.2% year-on-year in the first quarter. Gross domestic fixed capital formation, which measures investment spending and is usually more sensitive to economic conditions, contracted by an even larger extent of 13.9% as business sentiment soured. Only government spending registered a positive growth of 8.3%.
On the external front, total exports of goods dropped by 9.7%, as the pandemic resulted in a shock to both supply and demand by forcing production shutdowns and dampening consumer demand at the same time across the globe. Meanwhile, total exports of services fell by 37.8% as visitor arrivals plummeted.
These dire economic data may not come as a surprise, as many of us are aware of how devastating the coronavirus has done to public health and domestic economies in other locations. Governments around the world have rolled out emergency support measures on an unprecedented scale to ease the economic fallout resulting from the pandemic. In Hong Kong, the Government has also announced various support measures -- comprising a six-month job-saving scheme which helps businesses pay a portion of wages, a new 100% guaranteed loan scheme to help SMEs stay afloat, and a HK$10,000 cash handout for permanent residents to encourage consumption -- worth a total of HK$287.5 billion, or 10% of GDP.
Whether Hong Kong’s economy can rebound quickly like it did after the previous crises depends on both external factors, such as how long the coronavirus pandemic will last and developments in the U.S.-China relations – which we have little control over-- and internal factors, such as the timing of the Government’s relief measures and healing of internal divisions, where stakeholders might have more influence.
It is expected that the first tranche of payments under the job-saving scheme will be made in June, while the cash handout to individuals will be disbursed in July at the earliest. However, some businesses might not survive long enough to be able to take advantage of these supportive measures. As such, speeding up the disbursement of money to ease the cash flow drought is urgently needed to fight the pandemic and set the stage for economic recovery.
After all, it will be difficult for economic activity to bounce back when the pandemic is over if a large number of businesses have already folded.
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