As the current recession drags on, we take a look at its economic impact on Hong Kong from several different perspectives.
In June, the number of personal bankruptcy filings in Hong Kong was 886, down sharply from a 17-year high of 2,079 in May; the number of compulsory wind-up filings also dropped to 48, from 68 in the previous month, which was the highest level since July 2009 (Figure 1).
The high number of filings in May show that an increasing number of individuals and businesses have fallen into financial distress and have been unable to meet their financial obligations.
The dives in filings in February and April and spike in May – and subsequent drop in June – are partly attributable to the special work arrangements of the judiciary since late January, when the outbreak of Covid-19 significantly delayed court operations on bankruptcy cases.
To compensate for that distortionary effect, we can compare the first six months of 2020 with the corresponding period last year. The number of personal bankruptcy filings for the period from January to June was 4,497, representing a 16.5% year-on-year increase; the number of compulsory winding-up filings, on the other hand, posted a 4% decline.
The Government’s support measures have helped prevent some immediate business closures and bankruptcies, yet a third wave of local coronavirus infections, if persistent, might worsen the situation. Even in an ultra-low interest rate environment, which enables businesses to borrow cheaply, it would be difficult for those facing disruptions in global supply chains and a prolonged slump in both demand and income streams to survive.
The difficult business conditions will inevitably push the overall unemployment rate higher. From April to June, it had already risen to 6.2%, a level not seen in 15+ years and more than double the 2.8% rate a year earlier.
As we understand, the coronavirus pandemic has hit the retail, hospitality, tourism and airline industries particularly hard. In terms of age groups, young people are more exposed to the devastating economic fallout of the recession with their employment prospects disproportionately affected.
The unemployment rate among 15 to 19-year-olds has surged by 10.7 percentage points since the beginning of 2019 to 18.8%. That compares to a 3.4 percentage point increase for the overall rate (Figure 2).
Despite the fact that the Hong Kong economy has contracted since the third quarter of 2019, the stock market has been largely resilient during the same period.
Under the Covid-19 pandemic, investor sentiment has shifted from panic during the early stages to optimism, when central banks across the world started to provide liquidity on a huge scale into the financial markets. The balance sheet of the Federal Reserve has expanded from US$4 trillion in March to US$7 trillion by the end of June, thanks to the latest round of quantitative easing.
As such, there has been an increasing disconnect between financial markets and the real economy (Figure 3). The International Monetary Fund has warned that such decoupling and a potential correction in asset prices could pose a threat to economic recovery.
The Covid-19 pandemic has encouraged more consumers and businesses to use contactless payments and has accelerated the shift in Hong Kong to a cashless economy, a trend whose momentum started to build up before the coronavirus outbreak. Since the Hong Kong Monetary Authority launched the Faster Payment System (FPS) in September 2018, the total value of monthly payments using FPS has increased by over 500-fold (Figure 4).
As more businesses embrace technology and undergo a long overdue digital transformation, it is likely that productivity will be raised but some jobs may also be gone forever.
The drastic steps the Government has taken to save jobs by helping businesses pay a portion of their wage bills is considered by some as a crucial lifesaver. However, this can only be a short-term intervention to stabilize the job market and the wider economy, given the huge public outlay incurred in a short period of time.
The reality is that the economy will take some time to recover, and the size of the city’s fiscal reserves is not unlimited. Meanwhile, some economic sectors and age groups have been disproportionately affected by the coronavirus recession, and some workers who were made redundant over the past few months may find their jobs are not returning.
Untargeted massive spending might have been justified as an emergency measure during the early phase of this deep recession, but it cannot be considered as an ideal and permanent solution. In addition to protecting jobs, the Government will also need to help businesses adapt to the new normal and workers acquire new skills through retraining and vocational programmes.
Wilson Chong, [email protected]