Protest-hit Hong Kong crashes into recession

Bloomberg

Hong Kong’s economy contracted sharply in the third quarter as it entered a recession, exceeding economists’ worst estimates of the damage from nearly five months of protests.
Third-quarter gross domestic product retreated 3.2% from the previous three months, after a 0.4% contraction in the second quarter. That’s the worst slump since 2009, in the aftermath of the global financial crisis. Two consecutive periods of negative growth mean Hong Kong has fallen into a technical recession.
The economic debate now is focussed on how long the downturn will last, if recent glimmers of stabilisation point to a bottom, and if the US-China trade war and the demonstrations have done lasting damage. Financial Secretary Paul Chan said this week that a full-year economic contraction is “very likely.”
“It’s completely driven by social events, and this is something the government needs to consider,” said Raymond Yeung, chief Greater China economist with Australia & New Zealand Banking Group Ltd.
“It’s obviously comparable to the global financial crisis. We have a very similar situation that we don’t know when it’s going to end.”
The Hong Kong Monetary Authority cut its benchmark interest rate, in line with the city’s currency peg to the dollar following the US Federal Reserve’s reduction in borrowing costs. The move is unlikely to have much bearing on the local cost of borrowing, as lenders don’t necessarily pass on the rate to the public.
The city hasn’t seen significant capital outflow amid the unrest, HKMA Chief Executive Eddie Yue said at a briefing. The Hong Kong dollar rate, deposit level and exchange rate are broadly stable, he said.
The city’s economy has shown the faintest of positive glimmers since the protests’ initial impact this summer, when tourists began staying away. Small business sentiment has ticked higher, as has a gauge of the outlook among purchasing managers, though both remain close to their record lows. The real estate and financial services sectors have remained fairly resilient.
The MSCI Hong Kong Index tumbled as much as 18% from an April high, before recently clawing back some gains in October as relative calm descended on financial markets; the index remains positive for 2019.
While property prices have slipped about 5.5% since June, the Centaline Property Centa-City Leading Index is up for the year, hanging on to gains after a February low.
HSBC Holdings Plc, the largest lender in the finance hub, said adjusted pretax profit fell 12% to $5.3 billion for the third quarter.
Looking just at its Hong Kong operation, adjusted pretax profit inched up 1% in the quarter to $3 billion and executives said there hasn’t yet been a significant outflow of funds. Standard Chartered Plc also said it earned more in Hong Kong.
“We don’t see signs of a turnaround in Hong Kong’s economy any time soon as the factors undercutting growth persist.
While the government’s relief measures and loose monetary policy could offer some support, it would take time for tourists to return, shoppers to loosen purse strings, and global trade tensions to dissipate.”
Hong Kong’s Monetary Authority has sought to maintain stability in the city’s financial markets.
The Hong Kong dollar’s peg to the greenback isn’t likely in jeopardy despite the slowdown, said Jonathan Ostry, deputy director of the research department with the International Monetary Fund.