Economic Insights
Time to Reopen and Reconnect
Time to Reopen and Reconnect<br/>是時候通關並與國際重新接軌

The Covid-19 pandemic and the resultant social restrictions have wrought considerable damage on Hong Kong’s economy. Since the virus struck in January 2020, Hong Kong’s GDP has shrunk by some 5% compared to 2018 – the year just before the social unrest and the coronavirus outbreak. That some sectors have been disproportionately affected should not be a surprise. Although hindsight is 20/20, the lessons learned in responding to the unprecedented events in recent years could stand Hong Kong in good stead as challenges continue to loom large.  

For the first eight months of 2022, the retail market and restaurant spending were respectively 30% and 37% smaller in size compared to the same period in 2018. We can safely assume that a chunk of such losses was an unpalatable consequence of tough social-distancing restrictions and border controls, which effectively cut Hong Kong off from the rest of the world. External trade is a relative bright spot, with exports 13% above 2018 levels. 

With the Federal Reserve ramping up its fight against persistent inflation by aggressively raising interest rates since March this year, global markets have dived as various asset classes, including bonds and equities, real estate, and crypto-assets lost value. As investment and consumption activity shrivel due to higher borrowing costs, there are fears that the resultant economic outfall could be further magnified, brought about by the negative “wealth effect” caused by declining financial markets. In Hong Kong, the Hang Seng Index and residential property prices have already fallen by some 30% and 8% respectively since the beginning of the year. When people feel less well off, they tighten their belts. 

At the time of writing, the International Monetary Fund has just revised its global growth forecast for 2023 by a cut of 0.2 percent to 2.7% while maintaining the 2022 projection at 3.2% after three downward adjustments were made earlier this year. For Hong Kong, we will learn more about local business sentiment and outlook for the city’s economy when the Chamber conducts its annual Business Prospects Survey in November. 

Putting the economy on track will be no easy task as the brain drain-induced labour shortage has added to the list of business woes. Hong Kong’s total workforce has declined by 6% from its 2018 peak of 4 million. While a diminished labour pool has helped drive the unemployment rate down to 3.9% during the three months leading up to September 2022, compared to just over 7% in early 2021, the improvement has come at the expense of businesses, which have been struggling to fill vacancies in anticipation of a return to normality. 

As expectations of a continued – albeit gradual – relaxation in Covid restrictions grow, the demand for workers combined with a limited supply will likely push up wages. For many, especially SMEs, a rise in wage costs could not come at a worse period as many have already burned through their financial reserves to stay afloat amidst the pandemic, thereby limiting their ability to compete for workers. 

Another area that Hong Kong must address is underinvestment. While there is no such thing as an optimum investment level, the city’s capital spending in recent years relative to other advanced economies has been lagging. Over the past five years, Hong Kong spent the equivalent of 19.8% of its economic output on gross fixed capital formation – the amount invested by business and the government after discounting divestments – compared to the OECD average of 22.4%. This has the effect of inhibiting productivity, which is crucial to sustainable economic development and improvements in real wages and living standards. As Nobel Prize winning economist Paul Krugman once said: “Productivity isn’t everything, but in the long run it is almost everything.” 

The issues of labour constraints and underinvestment cannot be looked at in isolation, and the ability for Hong Kong to attract talent and investment rests on whether we can continue to be one of the most business-friendly places in the world. It is therefore even more critical that Hong Kong be seen as a hospitable and welcoming destination for talent and companies from around the world. We cannot afford to delay putting out the welcome mat as the rest of world has reopened, reconnected and restarted their economies. The window of opportunity is closing quickly, and as the decision to restore normalcy drags on so does the risk of finding that the ship has sailed.


Wilson Chong, [email protected]


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