For the first three quarters of 2019 as a whole, Hong Kong’s economy contracted by 0.6% year-on-year. 

With less than a month to go before we say goodbye to this unforgettably turbulent year, we can almost certainly rule out the possibility of any positive economic growth for the full year of 2019. To reach a level of even 0% annual growth, a real GDP growth of 1.8% would have to be achieved in Q4, at a time when the city is still struggling with severe internal and external economic challenges. 

With aggregate demand shrinking, many businesses are suffering. The results of the Chamber’s annual Business Prospects Survey, which was conducted during 4-8 November, have indicated weak business conditions in Hong Kong, and an equally bleak business outlook for the coming 12 months. 

For the first ten months of 2019, almost half of the survey respondents said their business turnover had dropped compared to the same period last year, versus 32% who said there had been no change and 13% whose turnover had risen (Figure 1). 

Meanwhile, 32% of respondents said they had hired fewer people compared to recruitment goals set at the beginning of the year, while 25% said they had invested less than originally planned (Figure 2 & 3). 

This came at a time when the tourism sector, as well as the trade and logistics sector – two of Hong Kong’s four pillar industries and which, when combined, account for roughly one-fourth of our GDP – are under tremendous pressure. 

The social tensions have taken a heavy toll on inbound tourism. According to the Financial Secretary’s blog, visitor arrivals dropped by over 40% year-on-year in October and the first ten days of November. 

At the same time, the trade and logistics sector is being hit by the China-U.S. trade war and slower growth in global trade. In October, the WTO lowered its forecasts for trade growth in 2019 and 2020. World merchandise trade volumes are now expected to increase by only 1.2% this year, down from the 2.6% growth forecast made in April. For 2020, growth is expected to be 2.7%, down from the previous forecast of 3.0%.

In Hong Kong, the ongoing protests and trade war played a major role in affecting respondents’ businesses, compared to the slowdown of China’s economic growth. A total of 67% of respondents said that the ongoing protests in the city was either a very important or an important factor, while 61% said the trade war (Figure 4). 

When asked about how their business was affected in general by the protests during June – October 2019, a combined 84% of respondents said their business had been affected (29% significantly, 30% moderately, 25% slightly affected). Only 13% said they had not been affected by the unprecedented social unrest in the city. 

Among those affected, almost half of them said business turnover had decreased either moderately or significantly (Figure 5).

The majority of respondents appeared to be adopting a wait-and-see approach as only 31% of respondents said their company had already implemented plans to mitigate the impact of protests (Figure 6). Among them, a total of 28% said reduction in capital investment, or other expenses on marketing and manpower was their key strategy; while 25% said price reduction (Figure 7).

Regarding the business outlook for the next 12 months, 37% of respondents expected turnover to drop, while 34% said it would be stable. Only 13% expected turnover to increase (Figure 8). 

Damage inflicted by the ongoing protests and the trade war will continue to take their toll on companies in 2020. A total of 69% of respondents said the ongoing protests would remain a key factor in affecting their business in the next 12 months, while 68% said the trade war. 

Against this background, businesses were cautious in making additional capital investment for their Hong Kong operations. Just over half (54%) of respondents planned to maintain capital investment levels in Hong Kong (Figure 9) and only 5% planned to increase. A similar situation can be seen in hiring plan (Figure 10), and only 28% of respondents said they planned to increase staff pay in 2020 (Figure 11).

Restoring normality is no doubt a critical element for the city’s recovery process. As such, 63% of respondents said that healing divisions in society and restoring law and order were the most useful Government measures that could support their business (Figure 12). 

For now, high levels of uncertainty in both domestic social stability and the trade war continue to dampen investment spending, which is traditionally the most volatile component of GDP over the business cycle. With so little festive spirit, it will be a not-so-merry Christmas for Hong Kong. 

Wilson Chong, [email protected]