As expected, Hong Kong plunged into recession in the third quarter, but the contraction was much worse than expected.
Out of the handful of economists surveyed by Bloomberg, the median estimate called for a 0.6% contraction during the period. Instead, the city’s economy shrank a ghastly 3.2% QoQ, the advance estimate from the Census and Statistics Department showed on Thursday.
On year, the contraction was 2.9%.
Clearly, that is a disaster, although nobody expected things would be pretty.
The breakdown is ugly. Fixed investment dropped more than 16% on year. That looks like the biggest decline since the Asian financial crisis. Private consumption fell 3.5% YoY during the third quarter, the first negative YoY print since the GFC. Although government consumption bounced to 5.3%, it wasn’t even close to enough to rescue the headline figure.
Here is the YoY chart:
It’s now “very likely” that the city will record negative growth for 2019 as a whole, the city said Thursday.
“Hong Kong’s total exports of goods registered an enlarged decline in the third quarter, reflecting the further slackening of manufacturing and trading activities worldwide”, the Census and Statistics Department remarked, on the way to lamenting the deleterious effects of “local social incidents” which took a “heavy toll on inbound tourism”.
Exports of services recorded the biggest YoY decline in more than 16 years.
“Domestic demand worsened significantly”, the release goes to detail. “As the weakening economic conditions dampened consumer sentiment, and large-scale demonstrations caused severe disruptions to the retail, catering and other consumption-related sectors, private consumption expenditure recorded its first year-on-year decline in more than ten years”.
Retail sales have, of course, contracted massively amid the social unrest which continues to manifest itself in violence.
One of the challenges relates to the interconnectedness of the protests with the US-China trade spat. Both of those things are putting pressure on the local economy, and they are inextricably bound up with one another.
Earlier this month, US lawmakers passed legislation in support of the pro-democracy demonstrators, something which rankled Beijing.
That said, Donald Trump has been reluctant to mount a full-throated defense of the protests for fear of derailing the trade talks. Indeed, reports indicate that during a June 18 phone call with Xi Jinping, Trump promised to stay quiet in order to avoid undermining planned trade negotiations at the Osaka G20.
Meanwhile, rumors continue to swirl around Carrie Lam, the city’s embattled Chief Executive who earlier this week called reports that she may be replaced “very malicious”.
Tourism has clearly suffered from the protracted unrest. In fact, visitor arrivals during the first two weeks of this month plunged some 50% from last year.
If you wanted to, you could point to a slight rebound in the PMI as a sign that things may have “bottomed”, but that would be a stretch.
Until the protests stop and there’s more clarity on the Sino-US trade dispute, it’s hard to see how this situation improves.
On the bright side, one local resident told us it’s still possible to have a decent weekend if you’re so inclined.
“It’s weird. You can throw Molotov cocktails and get tear gassed OR have a totally normal Sunday with nothing unusual at all”, she said.