Is Hong Kong in a recession or a depression now?

Some days an item of news just reaches out and grabs you and this morning it has come from the increasingly troubled Hong Kong. We knew that there would be economic consequences from the political protests there but maybe not this much.

The Census and Statistics Department (C&SD) released today (October 31) the advance estimates on Gross Domestic Product (GDP) for the third quarter of 2019.     According to the advance estimates, GDP decreased by 2.9% in real terms in the third quarter of 2019 from a year earlier, compared with the increase of 0.4% in the second quarter of 2019.

The commentary from a government spokesman confirmed various details.

marking the first year-on-year contraction for an individual quarter since the Great Recession of 2009, and also much weaker than the mild growth of 0.6% and 0.4% in the first and second quarters respectively. For the first three quarters as a whole, the economy contracted by 0.7% over a year earlier. On a seasonally adjusted quarter-to-quarter comparison, the fall in real GDP widened to 3.2% in the third quarter from 0.5% in the preceding quarter, indicating that the Hong Kong economy has entered a technical recession.

The concept of recession first switched to technical recession meaning a minor one ( say -0.1% or -0.2% GDP growth) but now seems to encompass what is a large fall. Time for Kylie again I guess.

I’m spinning around
Move outta my way

A clue to the change is the way that the year so far has fallen by 0.7% in GDP terms. If we look back we see that annual GDP growth of 3.8% slowed a little to 3% from 2017 to 18. But the quarterly numbers have been falling for a while. In annual terms GDP growth was 2.8% in the third quarter of 2018 but then only 1.2% in the last quarter and then going 0.6%, 0.4% and now -2.9% this year.

The Details

If we take the advice of Kylie and start breaking it down we see this.

Gross domestic fixed capital formation decreased significantly by 16.3% in real terms in the third quarter of 2019 from a year earlier, compared with the decrease of 10.8% in the second quarter.

Investment has taken quite a dive as this time last year it was increasing at an annual rate of 8.6%. Indeed the private-sector full stop took a fair hammering.

private consumption expenditure decreased by 3.5% in real terms in the third quarter of 2019 from a year earlier, as against the 1.3% growth in the second quarter.

The one bright spot was government expenditure.

     Government consumption expenditure measured in national accounts terms grew by 5.3% in real terms in the third quarter of 2019 over a year earlier, after the increase of 4.0% in the second quarter.

Is it too cheeky to suggest that at least some of this will be police overtime? So far it is not increased unemployment payouts

     The number of unemployed persons (not seasonally adjusted) in July – September 2019 was 120 300, about the same as that in June – August 2019 (120 600). The number of underemployed persons in July – September 2019 was 41 500, also about the same as that in June – August 2019 (41 000).

The flickers of acknowledgement of the present troubles were in the employment not the unemployment numbers.

 Total employment decreased by around 8 200 from 3 863 600 in June – August 2019 to 3 855 400 in July – September 2019. Over the same period, the labour force also decreased by around 8 500 from 3 984 200 to 3 975 700.

Also does the labour force fall suggest some emigration?

However you spin it the commentary is grim.

As the weakening economic conditions dampened consumer sentiment, and large-scale demonstrations caused severe disruptions to the retail, catering and other consumption-related sectors, private consumption expenditure recorded its first year-on-year decline in more than ten years. The fall in overall investment expenditure steepened amid sagging economic confidence.

Trade

This added to the woes as you can see below.

Over the same period, total exports of goods measured in national accounts terms recorded a decrease of 7.0% in real terms from a year earlier, compared with the decrease of 5.4% in the second quarter. Imports of goods measured in national accounts terms fell by 11.1% in real terms in the third quarter of 2019, compared with the decline of 6.7% in the second quarter.

Ironically this looks like a boost to GDP from a tale of woe. This is because the fall in imports ( a boost to GDP) is larger than the fall in exports. This situation reverses somewhat in the services sector presumably mostly due to lower tourism revenue.

Exports of services dropped by 13.7% in real terms in the third quarter of 2019 from a year earlier, following the decline of 1.1% in the second quarter. Imports of services decreased by 3.8% in real terms in the third quarter of 2019, as against the increase of 1.3% in the second quarter.

Looking Ahead

That was then and this is now so what can we expect?

Looking ahead, with global economic growth expected to remain soft in the near term, Hong Kong’s exports are unlikely to show any visible improvement. Moreover, as the adverse impacts of the local social incidents have yet to show signs of abating, private consumption and investment sentiment will continue to be affected. The Hong Kong economy will still face notable downward pressures in the rest of the year.

If we look at the results from the latest official quarterly business survey and note what happened in the third quarter then we get a proper Halloween style chill down the spine.

 For all surveyed sectors taken together, the proportion of respondents expecting their business situation to be worse (32%) in Q4 2019 over Q3 2019 is significantly higher than that expecting it to be better (7%).  When compared with the results of the Q3 2019 survey round, the proportion of respondents expecting a worse business situation in Q4 2019 as compared with the preceding quarter has increased to 32%, against the corresponding proportion of 17% in Q3 2019.

According to the South China Morning Post then prospects for China continue to weaken.

The manufacturing purchasing managers’ index (PMI), released by the National Bureau of Statistics (NBS) on Thursday, stood at 49.3 in October, down from 49.8  in September.  The non-manufacturing PMI – a gauge of sentiment in the services and construction sectors – came in at 52.8 in October, below analysts’ expectations for a 53.6 reading. The figure was also down from September’s 53.7, dropping to its lowest level since February 2016.

As to Japan there seems to be little hope as the Bank of Japan just seems lost at sea now.

As for the policy rates, the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.

Comment

As you can see the situation in Hing Kong is clearly recessionary and the size of it combined with the fact that it looks set to continue means it is looks depressionary as well. There has been a monetary respone but this of course only represents maintenance of the US Dollar peg.

The Hong Kong Monetary Authority (HKMA) announced today (Thursday) that the Base Rate was adjusted downward by 25 basis points to 2% with immediate effect according to a pre-set formula.  The decrease in the Base Rate follows the 25-basis point downward shift in the target range for the US federal funds rate on 30 October (US time).

As to the guide provided by the narrow money supply there is this.

The seasonally-adjusted Hong Kong dollar M1 decreased by 0.5% in September and by 3.4% from a year earlier, reflecting in part investment-related activities.

However you spin it people are switching from Hong Kong Dollars to other currencies.

The Investing Channel