Hong Kong protests and the US-China trade war are hurting the city’s economy, but Carrie Lam can stop things getting worse

Even as economists cut growth forecasts for Hong Kong, the civil unrest and trade war are likely to ensure that their projections turn out optimistic
The only way to dodge a recession is an urgent policy response that tackles the social inequity fuelling the public discontent

Alicia Garcia Herrero

Published: 6:00am, 12 Sep 2019

Why you can trust SCMP

The effects of the tumultuous events of the past three months are beginning to show, as Hong Kong’s social and economic situation deteriorates rapidly, casting doubts on the future of the city.

Along with the further deceleration of Hong Kong’s real GDP in the second quarter, from an already weak first quarter, a series of negative shocks has pushed Hong Kong government officials to radically cut this year’s growth forecast – to a range of 0 to 1 per cent, from 2 to 3 per cent.

Despite the extent of these cuts, the reality is that these projections are actually optimistic, given developments in July and August. There are two reasons for this.

First, the US-China trade war has continued to intensify over the summer, with no visible end in sight.

As mainland China’s super connector to the rest of the world, Hong Kong is still very dependent on trade flows, both logistically and financially. Yet, the prevailing winds do not bode well for the city, especially as the Trump administration could be set to increase import tariffs again on US$250 billion of Chinese goods, to 30 per cent from October 1.

The second reason that the third-quarter performance of the Hong Kong economy is likely to be poor is social unrest. Disruptions in key business areas and of key infrastructure, the forced closure of shops, and a fall in tourist numbers will no doubt harm the hospitality and retail sectors, the backbone of Hong Kong’s economy.

With all surveys on business confidence plummeting further, the prospects for investment activity certainly do not look positive either.

Hong Kong finance chief says protests could plunge city into recession

Quite like the trade war, the stand-off between the Hong Kong government, police and protesters appears deadlocked. Despite Chief Executive Carrie Lam Cheng Yuet-ngor’s decision last week to withdraw the extradition bill, a lasting solution to the crisis remains far from certain. Against the backdrop of local unrest and the US-China trade war, we should expect Hong Kong’s GDP growth to enter negative territory in the third quarter.

The negative situation in Hong Kong clearly calls for a policy response from the government. Aside from the recently announced HK$19 billion in sweeteners (a mere 0.7 per cent of GDP), which was too broad-based to target the city’s main problems, the government needs to announce a much bigger fiscal package to not only shore up business confidence and stabilise the economy, but address deep-seated social issues that have long troubled Hong Kong.

With the city’s very healthy fiscal condition, such a package is feasible.

As an initial and short-term response, measures could be directed to support personal consumption, which would have an immediate positive impact on GDP growth. However, to deal with the city’s most difficult challenges, it is important that new long-term fiscal measures are as progressive as possible, targeting the most vulnerable part of the population.

For example, a universal pension system for a targeted segment of the population, namely those unable to contribute, could send a positive signal about the government’s intention to build a much-needed welfare state in Hong Kong.

The social unrest also clearly calls for an end to Hong Kong’s reliance on one-off measures, which have been used to avoid incurring potentially burdensome liabilities in the future.

Income distribution has never been great and has only deteriorated during the last few years. There is no more time to waste to tackle this, with long-term measures needed to alleviate Hong Kong’s most pressing social issues.

After years of increasing house prices, at this current juncture, residential property prices have declined significantly in the second quarter, together with lower transaction volumes.

Therefore, in addition to government fiscal measures to improve income distribution, the Hong Kong Monetary Authority could consider lifting the macro prudential measures it has implemented to slow the rapid rate of increases in real estate prices, such as the high down payment and stamp duty, for the lowest income brackets in society. This is the only way to support the sector without worsening already meagre housing affordability in Hong Kong.

With both external and internal pressures, only a fast reaction from the Hong Kong government, with sizeable fiscal measures, can help avoid a recession. If such fiscal measures clearly target the most needy, these could help improve income distribution and help begin the process of tackling the difficulties faced by ordinary Hong Kong people.

Alicia Garcia Herrero is chief economist for Asia-Pacific at Natixis and senior research fellow at Bruegel

Post