HONG KONG

The technical recession in Hong Kong already started in Q3 2019 following the double whammy of U.S.-China trade tensions and social protests locally. The global Covid-19 pandemic is another sharp pressure on the Hong Kong economy. Even as many countries around the world (including Hong Kong’s trading partners) started to gradually reopen their economies by the end of Q2, a new wave of infections (as of end-July 2020) has forced Hong Kong authorities to re-impose social distancing measures locally. The epidemic situation, along with (geo)political tensions resulting from the newly implemented national security law, are likely to continue weighing on business and household sentiment. The recovery in consumption, retail and tourism activities – and the broader economy – is thus likely to be very slow.

We expect GDP to contract by -5.9% in 2020, resulting in the sharpest annual contraction on record, and two consecutive years of negative growth for the first time (-1.2% in 2019). As of June 2020, we expect a gradual recovery to bring GDP growth to +4.1% in 2021. However, risks are very clearly on the downside, stemming from the duration of the third wave of Covid-19 infections in Hong Kong and U.S.-China tensions in the wake of the national security law (in our central scenario, the latter does not disrupt Hong Kong’s business environment).

Hong Kong continues to record ample current account surpluses, and maintain large foreign exchange reserves. The external debt is hefty but should not be a matter of concern in the short-run. Indeed, in net terms, Hong Kong benefits from a strong creditor position: net external financial assets are 4.3 times the GDP (as of 2019).