Hong Kong: Economy contracts at sharpest rate in over one decade in Q4 2019
February 3, 2020
A preliminary GDP reading showed the economy contracted at the sharpest pace since Q2 2009 in the final quarter of last year, as mass protests battered domestic demand while the U.S.-China trade war and its own political rift with the mainland weighed on the external sector.
GDP tumbled 2.9% in year-on-year terms in the fourth quarter, following Q3’s revised 2.8% decline (previously reported: -2.9% year-on-year). Meanwhile, on a seasonally-adjusted quarter-on-quarter basis, the economy fell 0.4% in Q4, but less sharply than Q3’s 3.0% revised contraction (previously reported: -3.2% quarter-on-quarter). After contracting for three consecutive quarters, Hong Kong’s economy shrank 1.2% over 2019 as a whole —marking the worst result since the 2009 recession.
The fall in annual GDP in the fourth quarter was primarily driven by a sharp decline in fixed investment (Q4: -16.2% yoy; Q3: -15.2% yoy), while private consumption also contracted, albeit at a softer pace (Q4: -3.0% yoy; Q3: -3.3% yoy). In contrast, public consumption growth accelerated slightly from 5.9% in Q3 to 6.0%, as the government unleashed fiscal stimulus in a bid to counter the effects of the political crisis.
On the external front, growth in both exports and imports of services contracted at a sharper rate in Q4 relative to Q3. The frail external sector points to tepid domestic activity and also deteriorating business ties with mainland China.
In January, Moody’s credit rating agency downgraded Hong Kong’s credit rating from Aa2 to Aa3. Explaining its decision, Moody’s noted:
“The underlying drivers of the protests are certainly deep-seated and intractable. Nevertheless, the response by Hong Kong's government to both political demands by parts of the population and broader concerns […] has been notably slow, tentative and inconclusive. On the economic and social front, while several fiscal stimulus packages have been announced since last August, Moody's does not expect that the measures planned so far will effectively improve housing affordability or start addressing demands for a more equal distribution of income and wealth.”
Looking ahead, a softer drop in domestic demand and less of a drag from the external sector due to a low base effect and possible abatement of headwinds should support an economic recovery. That being said, the economy is expected to remain choked by the lingering effects from the U.S-China trade dispute, ongoing civil unrest and the recent outbreak of the coronavirus. Consequently, the economic prospects for Hong Kong’s economy will likely continue to deteriorate in the coming months.
Author: Steven Burke, Economist