From Focus Economics: Hong Kong's Outlook Worsens Ongoing protests contributed to the softest expansion in nearly a decade in Q...

Hong Kong Flirting With Recession

From Focus Economics:
Hong Kong's Outlook Worsens

Ongoing protests contributed to the softest expansion in nearly a decade in Q2 and data for Q3 suggests activity remains dismal. Retail sales plunged in July, while the PMI continued declining in July-August. Moreover, public unrest, trade tensions and weaker domestic growth are weighing on the all-important Hong Kong real estate market, which bodes poorly for investment and business confidence. That said, July’s pick up in domestic credit growth should be buffering domestic demand. In other news, Fitch Ratings downgraded Hong Kong’s credit rating one notch from AA+ to AA with a negative outlook on 6 September, citing turmoil with China denting the island’s reputation for stability and ease of doing business. In politics, Carrie Lam, Hong Kong’s chief executive, announced the withdrawal of the extradition bill in early September, however, the move did little to calm protests.

Hong Kong’s outlook continues to moderate amid civil unrest, escalating global trade tensions and deteriorating prospects for China. Turning to 2020, growth will likely gain momentum on stronger household spending and an expected rebound in fixed investment, although the outlook will partly hinge on current political developments. Our panel expects growth of 0.9% in 2019. Moving to 2020, the panel expects the economy to grow 1.8%, which is down 0.2 percentage points from last month’s forecast.

The IHS Markit Purchasing Managers’ Index (PMI), plunged from 43.8 in July to 40.8 in August, marking the lowest reading since February 2009 amid mass protests and elevated global trade tensions.

The decline was mainly driven by sharper falls in production and new orders. Record-low demand from mainland China, mainly the result of a weaker yuan, the U.S.-China trade war and protests, was behind the steep plummet in new order intakes. Moreover, business sentiment deteriorated sharply. On the price front, both input and output prices were reduced in August. Commenting on August’s print, Bernard Aw, an economist at IHS Markit, noted: “The latest PMI data reveal a Hong Kong economy flirting with recession in the third quarter as business activity is increasingly aggravated by protest-related paralysis. The survey is now broadly indicative of the economy contracting at an annual rate of around 4.0-4.5%.”

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