Hong Kong economy improving too slowly
Since the third wave of Covid-19 started in June, Hong Kong’s economy is widely expected to take another hit in Q3 after plummeting around 9% in H1 2020. Still, the negative performance in Q3 moderated thanks to a rather positive September. The fewer cases allowed the government to relax restrictions and partially reopen the economy.
As regards consumption, the third wave has taken a toll but it was less severe than in the beginning of the year. Retail sales have recovered to 87% comparing to August 2019. The loosened social distancing increased people’s mobility, especially to supermarkets and pharmacies (from -0.9% in Q2 to 10.9% in Q3, compared with the base period at the beginning of the year, according to Google mobility). However, the restrictions on cross-border people movement still weighed on the spending from inbound travelers, affecting total consumption in Q3.
After experiencing negative growth in the first two months of Q3, Hong Kong’s international trade finally showed some improvement thanks to the rebounding trade growth in Mainland China. Notably, export and import accelerated by growing 9.1% and 3.4% YoY in September respectively. Furthermore, the port container throughput reported by Kwai Tsing and other terminals have recorded a significant improvement, and the cargo loaded and discharged by air has seen less decline in August 2020, indicating signs of gradual trade recovery.
On real estate, an important pillar for Hong Kong, there was indeed limited recovery in transactions and prices have been looming. For residential property, there has been a slight rebound in transactions but the Centaline’s leading indicator shows a decline of home prices. Improvement was also seen in the transaction value of the office properties, which has reverted turned to positive growth in August 2020, but the situation was still worrying for commercial property.
Although business sentiment has improved in September, the PMI continued to stay in the contraction territory at 48. Headwinds also remained tough with unemployment rate jumping from 6.1% in August to 6.4% in September. Despite the wage subsides offered by the government, more employers may have decided to lay off staff as the hope of quick economic rebound continued to fade. The phantom of unemployment is likely to cloud over economic growth further with pressure on the sectors being hit the most by the Covid-19, as illustrated in the recent example in the aviation sector.
To gauge the overall performance of the Hong Kong GDP in Q3 2020 before the official announcement, we adopt the MIDAS (Mixed Data Sampling) regression method to combine all the above monthly and weekly indicators and nowcast Hong Kong’s GDP. The nowcasting exercise leads to a prediction of -7.3% YoY growth in Q3, indicating a moderate improvement compared with the last two quarters. Still, the improvement was largely supported by the low base in Q3 2019. All in all, the weakening economic momentum has already shown to be more lasting than the 97-98 and 08-09 financial crisis.
Moving forward, the economic situation in Hong Kong will hinge on how the city can contain the spread of the Covid-19, especially during winter, and whether it can partially recover business flows with the world. If the answer is an optimistic yes, we should expect the economy to improve especially for retail sales but it seems unlikely to expect a full recovery in the short run.