Since the world's stock markets hit a nadir in early March, investors' expectations have fallen so low that they have been ready to uncork the champagne whenever economic data turned out to be slightly better than expected. Now, there is good reason for everyone to face reality. A string of data released this week, in Hong Kong and elsewhere, offers little cause for comfort. These are not the green shoots of recovery.
Our city's first-quarter gross domestic product shrank by 7.8 per cent from the same period last year, making it the most severe quarterly contraction since the Asian financial crisis in 1998. Our exports dropped by 22.7 per cent, the worst in more than half a century. New numbers from overseas look equally grim. The GDP of the euro zone - the collective economy of 16 countries that use the euro - shrank by a massive 2.5 per cent in the first quarter. The activities of Chinese producers and US consumers are pivotal to any recovery for the world economy, but the latest figures are not reassuring. Both mainland exports and US retail sales from last month fell much more than anticipated. This does not bode well for an economy which is as dependent as ours on outside factors.
This was the warning that Chief Executive Donald Tsang Yam-kuen was trying to issue in the legislature on Thursday, when his gaffe about the Tiananmen Square crackdown distracted everyone. The full-year GDP is projected to shrink between 5.5 per cent and 6.5 per cent. This looks terrible, but at least the forecast - if proven correct - means things will pick up in coming quarters.
The government is earmarking about HK$10 billion for new relief measures, a modest amount that will help the very poor and perhaps some distressed small and medium-sized businesses. This is needed. However, it will not amount to a major stimulus package - nor should there be one. Our city is experiencing a severe recession, not a meltdown of the financial system as was the case in the United States and Britain. The government has already guaranteed loans for local enterprises worth HK$17.6 billion. It has also committed many more billions to major infrastructure projects. We do not want to be saddled with white-elephant projects and bad businesses propped up by taxpayers' money when the economy recovers.
A harsh dose of reality is much needed; it is unrealistic to expect a speedy recovery from such a severe global crisis. Such unrealistic hopes might have been encouraged by the market rallies in the past two months. But as Nobel Prize-winning economist Paul Samuelson once wryly observed, the stock market had predicted 'eight of the last five' recessions. The market's lack of prescience no doubt extends to recoveries as well.
Many people were expecting a free fall for the world economy in early March. That was being priced in by markets around the world when they were hitting rock bottom. It turned out that governments and central banks had pumped enough liquidity to prevent an outright collapse. The rallies, therefore, were repricing the risks and, apparently, getting ahead of themselves. Now, a correction looks likely - not to dampen hopes, but to reimpose realistic expectations.