Economic Insights
Global Economy in an Age of Uncertainty
Global Economy in an Age of Uncertainty<br/>環球經濟處於不確定世代

After a turbulent year for Hong Kong, will the economy get back on track in 2020? And how will some of the world’s major economies – which also have a significant impact on Hong Kong’s development – fare in the near future? We consider the outlook for the year ahead.

It is estimated that the Hong Kong economy registered its first annual contraction in a decade in 2019. Based on our analysis, it might be possible for Hong Kong to register positive year-on-year growth in the second half of 2020 as a result of a possible easing of social tensions by the end of Q1, a low base effect, and an expected influx of fiscal stimuli from the Government. 

However, high levels of uncertainty in domestic social stability, the local business environment, and global trade policies, could constrain the overall pace of economic recovery. In particular, investment, which contracted by double digits in both Q2 and Q3 2019, is likely to remain weak in Q4 and 2020, as businesses adopt a wait-and-see approach. This was reflected in the results of the Chamber’s annual Business Prospects Survey conducted in early November. 

In addition, both business and consumer sentiment could turn sour quickly should severe social unrest flare up again or any other controversies emerge. Given these caveats, we expect the Hong Kong economy to grow at a range of -0.5% to 0.5% in 2020. 

The U.S. economy is expected to grow at a slower pace this year, reflecting a shift in the fiscal stance from expansionary in 2019 to “broadly neutral” in 2020, as described by the IMF. On a positive side, the risk of a recession in 2020 has receded, as the Federal Reserve might keep interest rates, currently at 1.5%-1.75% after three rate cuts last year, low for a longer duration in order to avoid a recurrence of altering its monetary stance within a short space of time, and a partial trade deal has been reached with China. 

Nevertheless, few would be optimistic about the trade relationship between the world’s two largest economies in the longer term, following the multiple rounds of conflict escalation and de-escalation over the past 20 months. It is a hard truth that the Trump administration’s tough stance on Beijing represents a bipartisan consensus in the U.S. While some joke that free trade has become politically homeless in Washington, the results of the U.S. presidential election to be held in November 2020 may not make any difference to the trade relationship.

As to the Chinese economy, it is being dragged down by cyclical factors as well as structural issues such as an ageing population and lower productivity growth. During 2000-2018, the number of Mainland citizens aged 60 or above rose from 126 million to 249 million, with their share of the total population increasing from 10.2% to 17.9%. 

Meanwhile, the Mainland’s growth in total factor productivity, an important driving force of long-term economic growth, declined from 1.9% during 2000-2007 to -0.4% during 2010-2017, and -0.6% in 2018, according to the Conference Board. 

To achieve its goal of doubling GDP in 2020 from the 2010 level, the Mainland would originally have needed an annual real GDP growth of around 6.2% on average in 2019 and 2020. However, the required growth rate could be lowered somewhat, after an upward nominal GDP revision for 2018 by 2.1% made by the National Bureau of Statistics in October (At time of writing, the bureau had not provided a revised real GDP growth rate for 2018.) 

Beijing has so far refrained from resorting to massive stimulus measures, but has introduced measures such as tax reforms and targeted cuts in banks’ reserve requirements. Following the latest GDP revision, its tolerance for slower growth has likely risen without jeopardizing its chance of achieving its aim of doubling the national economic size by 2020. 

Growth in the Eurozone, which has been subdued over the past decade, is expected to remain modest this year. This is in the context of structural shifts including changing consumer 

preferences affecting the German automobile sector and its supply chains in the rest of the continent, Brexit-related uncertainty, as well as the strained trade relationship between the European Union and the United States.  

The inflation rate in the single-currency bloc remains far below the European Central Bank’s (ECB) target of “below but close to 2%” and growth is stuck at low levels, leading to growing fears of “Japanification.” Christine Lagarde, the new ECB President, and other European leaders will need to do a great deal to avoid this prophesy becoming self-fulfilling.

Wilson Chong,