A recession is looming for Hong Kong, calling for bigger fiscal stimulus

• Hong Kong’s economy is undoubtedly under massive pressure, not only because of the earlier concerns on the US-China trade war which could erode Hong Kong’s benefits as a trade hub for mainland China, but also due to the recent escalation of social unrest which weighs on retail sales and investment.
• Most of the latest economic data released for Hong Kong was mainly for Q2 2019, covering only 2 weeks of the 11-week long protests. In other words, the worst time so far is not reflected in the economic data yet. According to the existed data released for July, nearly all of them point to a clearly downward cycle (Chart 1). The PMI has dropped sharply to 43.8, and even the very stable unemployment rate ticked up to 2.9% in July, the first time it moved since last June.
• While little information can be retrieved from the official data beyond July, our Natixis calculation of the sentiment embedded in local news using GDELT big data set quantitatively shows that the worries over Hong Kong have worsened both domestically and overseas (Chart 2). More importantly, sentiment on the health of the Hong Kong economy has deteriorated even more rapidly. Against the backdrop, we should expect the Hong Kong’s GDP growth to be much worse in Q3 than Q2, decelerating to -0.6%.
• But looking forward, one has to bear in mind that the Q4 growth in 2018 was only 1.2%, the lowest Q4 figure after 2008, so the base effect could bolster the growth number for Q4 in 2019. Beyond the base effect, the clearly negative situation in which Hong Kong finds itself calls for a policy response from the Hong Kong government. Given that the only demand policy left to Hong Kong is fiscal (as monetary and exchange rate policies are determined by the Federal Reserve under the HKD currency board regime), this is where we should expect action. Aside from the recently announced $19 billion sweeteners, the government clearly needs to announce a much bigger fiscal package to shore up business confidence and stabilize the economy. This is obviously feasible given Hong Kong government’s healthy fiscal condition accumulated over the past decades. The most likely measures should be directed to support personal consumption and real estate investment, which could generate an immediate impact on GDP growth.
• All in all, we should expect a slower growth for Q3 and a significant rebound for Q4. The likely scenario of massive stimulus towards the end of the year could support the growth of Hong Kong to maintain 0.5% for the whole year.

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