Rarely have Hong Kong people had such a cheerless summer. The city’s real GDP grew by 0.5% year-on-year in the second quarter of 2019, the slowest pace in nearly a decade. It was marginally down from the 0.6% growth in the previous quarter, amid the persistently weak global growth and trade environment, as well as the escalating political tensions in the territory.
Domestically, private consumption expenditure expanded faster in Q2 than Q1, while growth in Government spending maintained a similar rate. However, gross domestic fixed capital formation, which measures investment spending, contracted significantly by 11.6%, compared with the decline of 7.0% in Q1 (Figure 1).
Compared to household and Government spending, investment spending is more sensitive to economic conditions. Worryingly, expenditure on acquisitions of machinery, equipment and intellectual property products, of which 87% came from the private sector, was down by 12.4%, as businesses became more and more cautious in capital investment. This number provides us with some insights into how the corporate sector views the economy.
Expenditure on building and construction fell 10.6%, with the private and public sectors down by 6.2% and 19.5% respectively. However, the latter’s decline was partly due to the completion of two major infrastructure projects, namely the Hong Kong-Zhuhai-Macao Bridge and the Express Rail Link (Table 1).
On the external front, total exports of goods dropped 5.6% in Q2 from a year earlier, compared with the decrease of 3.7% in Q1. Re-exports, which account for virtually all exports from the city, would hardly be immune from the downturn. In particular, the value of re-exports of Mainland origin to the U.S. that were hit by additional tariffs introduced by the U.S. shrank 30.6% in Q2, following a 22.9% decline in the previous quarter.
Some have said that ASEAN could provide a safe haven from the trade war. However, that might be unrealistic, as demand has softened all over the place. Growth in re-exports to ASEAN, which had prominently outperformed the overall re-exports figure in Q1, slowed sharply in Q2 and registered a year-on-year decline in both May and June (Figure 2).
On a seasonally adjusted quarter-to-quarter basis, real GDP contracted by 0.4% in Q2. In other words, Hong Kong is now on the brink of a technical recession, which is conventionally defined as two consecutive quarters of negative growth. All the signs seem to suggest that a recession is unavoidable.
According to the WTO’s Goods Trade Barometer, the growth of world merchandise trade volumes is likely to remain weak in the third quarter of 2019. The latest reading of 95.7 released in August is lower than the critical 100 mark and the previous reading of 96.3 in May, indicating that stronger trade growth is not yet in sight.
The expected weakness in the external environment is echoed by the meagre performance of the Korean trade sector, which is often regarded as a barometer for regional trade in this part of the world, considering the country’s important semiconductor industry. Korean exports were down 11% year-on-year in July, the eighth consecutive month of declines.
Although the U.S. Federal Reserve cut the Fed Funds Target Rate by 25 basis points to 2-2.25% at its July meeting, and markets are expecting more rate cuts in the rest of the year, the relaxation of U.S. monetary policy might allow President Donald Trump more room to escalate the trade war with Mainland China. A day after the Fed’s latest interest rate move, Trump announced additional tariffs on US$300 billion of Chinese goods.
Not to mention the recent social tensions in Hong Kong, which have taken a toll on inbound tourism and local households’ consumption sentiment. While consumer sentiment may swing back quite swiftly, the impact on tourism-related sectors could last much longer, as travellers normally plan their trips in advance.
The Government has slashed its growth forecast for this year to 0% to 1% and unveiled a HK$19.1 billion fiscal stimulus package, including waiving 27 groups of Government fees and charges as well as enhancements to Government funds. Such discretionary spending (equivalent to 0.7% of Hong Kong’s GDP in 2018), aided by the city’s healthy fiscal position and sizable reserves, should help even out the fluctuations in the economy to a certain extent.
Responding to economic cycles in a timely manner is important. However, some of the measures will need the approval of the Legislative Council, which is currently in recess until October. A formal framework of counter-cyclical measures should be formulated in the future, to ensure that the Government can spend effectively and efficiently when needed, while maintaining the discipline of not postponing fiscal retrenchments – i.e. the reversal of stimulus introduced during bad times – when the economy recovers.
It is highly likely that the city’s economic growth for the whole year of 2019 will slow sharply from last year’s 3.0%. The unemployment rate, a lagging economic indicator, has already bottomed out from its previous level of 2.8%. This could dampen consumer sentiment, and hence business investment and ultimately the overall economy. Meanwhile, settling societal differences as soon as possible may help minimize the negative impacts to the local economy so that everyone can focus on riding out the storm.
The recent trade war escalation ignited by Trump’s tougher stance has brought higher anxiety and uncertainty. Added to this is the seemingly perpetual social tensions and conflicts in the city. These have created a perfect storm, rocking business sentiment and investment with longer-lasting effects.
An economic storm by itself may not hurt the local economy that badly. It is the ability to bounce back that matters more. It is no doubt high time for Hong Kong to demonstrate its resilience. After all, as Warren Buffett once said: “You only learn who has been swimming naked when the tide goes out.”