Hong Kong quarterly: which industries will survive the deep recession?

Hong Kong has had difficulty coming out recession

The economy has been in recession since 3Q19, and fell by -8.9%YoY in 1Q20, which is the deepest contraction since 1974 when the data was first compiled. 

The trade war clearly hurt economic growth in 2019, with GDP growth of just 0.7%YoY and 0.4%YoY in the first two quarters of 2019, respectively. 

The arrival of social unrest, together with the trade war, brought the economy into recession, with drops of -2.8%YoY and -3.0%YoY in the third and fourth quarters of 2019.

Then came Covid-19.

But just as the pandemic seems to be subsiding in Hong Kong, social unrest is returning. We expect full year GDP growth at -4.1%. This is based on the assumption that there will be no material trade war between China and the US. 

Hong Kong‘s importance to Mainland China in terms of GDP

ING, National Statistic Bureau (Mainland China), Census and Statistics Department (Hong Kong)
ING, National Statistic Bureau (Mainland China), Census and Statistics Department (Hong Kong)

Who’s been hurt most?

Looking at the damage to industry, we believe that a better gauge would be employment data. In Hong Kong, redundancy costs are not as high as in Europe. So when businesses expect a long term downturn, they hire fewer people or even lay off staff. 

Which industry stands out?

Hong Kong should continue to leverage its financial and legal system to serve the offshore financial needs of Mainland companies. This will continue unless Mainland China’s financial system matures, e.g. via interest rate liberalisation. Hong Kong could have another 10 years to enjoy this privilege.

Businesses of residential property developers should be fairly stable because the unemployed are mostly in the low-income group, which could not afford to buy a private flat even before the triple hits to the economy. But property investors of commercial and retail could stay on the sidelines as they wait for the social unrest to fade and to see how the trade conflict pans out.

While there are policies to encourage the development of technology as an industry in Hong Kong, Shenzhen is located very nearby, and there is already a cluster of well-established tech companies here, as well as a pool of talent from other cities in Mainland China and from the rest of the world, including Hong Kong. As such, Hong Kong can’t really compete on this one.  

ING, Census and Statistics Department of Hong Kong SAR
ING, Census and Statistics Department of Hong Kong SAR