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Hong Kong: Pro-democracy protests disrupt retail sector, long-term impact clouded by uncertainty

October 21, 2014

The student-led pro-democracy protest movement that broke out in Hong Kong in late September appeared to be losing steam as it entered its third week, but tensions flared up again on 15 October. Police forces sent in to remove barricades in a key part of the business district clashed violently with protestors as they attempted to hold their ground. Government loyalists and counter-protestors were also involved in the confrontation. The disruption of traffic and activity in the area is taking a toll on the economy, and with no resolution to the standoff in sight, the protests are likely to continue and the economic impact will likely intensify.

Hong Kong’s retail sector stands to lose the most in the short term because of the protests, not only because of the drag on consumption by locals, but also because of a drop in spending by tourists. Retail sales represent almost a quarter of Hong Kong’s GDP, and non-residents, particularly those from the mainland, account for roughly 80% of tourist spending. Retail businesses in Hong Kong are having a notably-slow year to begin with as the Chinese government’s crackdown on corruption among officials has put a dent in the sale of luxury items in Hong Kong. A drop in the number of mainland tourists and the ongoing obstruction of shopping centers will only make things worse.

For the time being it appears that the financial services sector is operating smoothly, beyond the delays and inconveniences that have been caused for workers. Moreover, analysts point out that business and activity in the area could go back to normal very quickly if the protest movement ends. However, if the protests are dragged out for much longer, the effects could become more important and take a toll on Hong Kong’s fourth quarter performance. Additionally, there is concern that prolonged protests could damage Hong Kong’s reputation as a global financial hub and attractive investment destination, as well as a business gateway to mainland China. There is also the risk of increasing political instability because the current protest movement may encourage others who are at odds with the central government in China to demonstrate in public.

While tourism and retail are set to suffer declines due to the protests, fears that the city’s economy is going to totally collapse seem exaggerated. What happens in the coming weeks and months may have a more lasting impact, but uncertainty regarding a political resolution is clouding the outlook.

The government sees the economy expanding between 2.0% and 3.0% this year. FocusEconomics Consensus Forecast panelists see the economy growing 2.4% in 2014, which is down 0.1 percentage points from last month’s forecast. For 2015, the panel expects the economy to grow 3.1%, which is also unchanged from last month’s projection.

Author: Ricard Torné, Lead Economist

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