A special survey on the Hong Kong political crisis When will political unrest subside? “An amicable resolution to the crisis would t...

Outlook deteriorates in Hong Kong


A special survey on the Hong Kong political crisis

When will political unrest subside?

“An amicable resolution to the crisis would take compromise on both sides but we see the key issues being that of electoral reform (what the protesters call universal suffrage) and the setting up of an independent commission of inquiry into alleged police brutality. The anti-government movement must also be willing to see their five demands as separate issues, rather than an indivisible package.” - Fitch Solutions

“The authorities will eventually have no choice but to make a meaningful concession.”- Kasikorn Research

What assets will be affected?

“We expect to see some spill-over into the real estate sector. Demand is likely to soften as protests will place a drag on investor confidence, and slowing economic growth will weigh on purchasing power of Hong Kong residents. At the same time, the government seems to be placing emphasis on the housing market to placate protesters, which will likely see a slight increase in housing supply. In her policy address in October, Chief Executive Carrie Lam focused on housing and land policies, proclaiming that these would alleviate ‘issues of greatest public concern.” - Fitch Solutions

 “With less inbound tourism coming from China, the personal financial and insurance services would be affected as the protests persist, although I don’t expect the demand for these services to decline significantly. The institutional activities (such as IPOs) are unlikely affected.” - Oxford Economics

“Real estate seems to be already affected by subdued price growth, in some reported cases heavy discounting by agencies, which in turn affects profitability. As for financial and insurance, I think Hong Kong’s reputation of a financial hub will be left intact.” - Moodys

Outlook deteriorates in Hong Kong
\The economy declined notably in the third quarter, as widespread protests undercut domestic demand. Private consumption and fixed investment nosedived, while exports were also down markedly. Turning to the fourth quarter, economic conditions likely remain anemic. The private sector PMI continued to freefall in November as business activity fell at the sharpest pace on record. Moreover, in October, retail sales plummeted to an all-time low; tourist arrivals continued to tumble; and unemployment ticked up to the highest rate since September 2017— boding poorly for household spending. In politics, an overwhelming majority of pro-democracy candidates were elected in the local district council elections in late November. On 4 December, the IMF concluded its Article IV visit. The Fund recommended a notable increase in fiscal stimulus to counter the downturn, mainly by addressing housing supply and income inequality

The economy is seen recovering next year on a favorable base effect and some support from fiscal stimulus. However, activity is set to remain weak, as political turmoil will likely continue weighing on domestic activity. A further deterioration of the domestic situation and the U.S.-China trade war are the key downside risks. Our panel expects growth of 0.3% in 2020, which is down 0.4 percentage points from last month’s forecast. Moving to 2021, the panel projects the economy to grow 2.4%.

Real Sector
The revised GDP reading confirmed the economy contracted at the sharpest pace since June 2009 in the third quarter, as Hong Kong faced the double whammy of mass protests battering domestic demand and the U.S.-China trade war hampering the external sector. GDP tumbled 2.9% in year-on-year terms, which is unchanged from the preliminary reading, following Q2’s 0.4% expansion. Meanwhile, on a seasonally-adjusted quarter-on-quarter basis, the economy fell an unrevised 3.2% in Q3, which was steeper than Q2’s 0.5%. The fall in year-on-year GDP in the third quarter was mainly driven by a revised 3.4% decline in private consumption (previously reported: -3.5% yoy; Q2: +1.3 yoy), while fixed investment contracted at an unrevised pace of 16.3% in Q3 (Q2: -10.8% yoy). In contrast, government consumption growth accelerated from 4.0% in Q2 to a revised 5.9% (previously reported: 5.3% yoy). On the external front, both exports and imports of goods and services contracted at a sharper pace in Q3 relative to Q2. Muted demand from mainland China weighed on exports, while depressed business and consumer sentiment have suppressed import demand in recent months.

PMI Sinks to 15 year low
The IHS Markit Purchasing Managers’ Index (PMI) slipped to 38.5 in November (October: 39.3), marking the worst reading since April 2003. November’s deterioration came on the back of business activity slumping at the fastest pace since contemporary records began and new business falling at the steepest pace in 11 years. Moreover, headcounts declined slightly and backlogs of work dropped steeply. Needless to say, business sentiment remained the lowest on record in November, as many firms expect lower output in a year from now due to ongoing political unrest. On the price front, input prices fell in November, mainly due to a decrease in staffing costs, while output prices also dipped. Commenting on November’s print, Bernard Aw, an economist at IHS Markit, noted: “The average PMI reading for October and November combined showed the economy on track to see GDP fall by over 5% in the fourth quarter, unless December brings a dramatic recovery.” Going forward, political turmoil and the U.S.-China trade war will continue to undermine Hong Kong’s private sector, which is currently undergoing the worst deterioration since the severe acute respiratory syndrome (SARS) epidemic in 2003. With no clear end in sight to either headwind, business investment will likely continue to markedly contract, which could translate in to a significant spike in unemployment.


Retail Sales
Retail sales by volume plummeted 26.2% year-on-year in October, even more sharply than September’s revised 20.3% freefall (previously reported: -20.4% year-on-year). The knock-on effects from the civil unrest, which has hammered tourist arrivals and caused several major shopping outlets to temporarily close, continued to take its toll. In October, tourist arrivals plunged 43.7% year-on-year, after nosediving 34.2% year-on-year in September. This was despite China’s “Golden Week” holiday that commences in the first week of October each year and brought in roughly 4.7 million tourists from mainland China in the same month last year. The stronger deterioration in sales volume was mainly driven by a more pronounced fall in clothing and footwear; durable goods, notably motor vehicles and electrical goods; and sales of jewelry, watches and clocks. On a seasonally-adjusted, three-month moving average basis, retail sales by volume in the August–October period tumbled 18.5% from the preceding three-month period, down from the 16.7% decline in July–September.

Overall, the annual average variation in retail sales volume fell 8.5% in October after falling 5.9% in September. Going forward, civil unrest seems set to continue to depress the retail and tourism sectors, which will likely bring about a slight fall in employment levels, further suppressing private consumption in turn. FocusEconomics Consensus Forecast panelists expect retail sales to decrease 4.9% in 2020, which is down 3.9 percentage points from last month’s forecast. For 2021, the panel sees retail sales growing 6.5%.

Thank you FocusEconomics

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