Hong Kong’s economy contracted by the most on record last quarter as tourism collapsed, trade flows slowed sharply and social distancing weighed on domestic spending.
Epidemiological success, economic pain
- Hong Kong’s economy contracted by the most on record last quarter as tourism collapsed, trade flows slowed sharply and social distancing weighed on domestic spending.
- The city’s GDP fell 5.3% q/q in seasonally-adjusted terms following a 0.3% decline in Q4. As a result, year-on-year growth dropped from -2.9% to -8.9% (Bloomberg median: -6.7%, CE: -9.5%). (See Chart 1.)
- This contraction reflects efforts to contain COVID-19 both within Hong Kong and in China in Q1. The city’s retailers are heavily reliant on spending by mainland Chinese tourists. Cross-border travel was restricted in early February, with tourist arrivals subsequently falling close to zero. (See Chart 2.) And while Hong Kong never imposed a full lockdown, congestion data suggest that residents were quick to practice social distancing.
- These early interventions succeeded in slowing the spread of the virus. The daily number of new cases peaked at 65 in late March and has since dropped back to close to zero during the past couple of weeks. But this was at the expense of a deep slump in retail sales and private consumption, which makes up over two thirds of the city’s GDP. (See Chart 3.) The other key headwind was goods exports, which contracted 9.7% y/y in Q1, as factory shutdowns on the mainland reduced the flow of goods through the city.
- Hong Kong’s epidemiological success means that social distancing may be less of a drag on consumption in the coming months. But any recovery will be tepid and held back by rising unemployment, which reached a decade high in March. What’s more, tourism is likely to remain in the doldrums for a while and trade flows are set to weaken even further this quarter given the widening global shutdowns. (See Chart 4.) Our current forecast for a 5.5% contraction in Hong Kong’s GDP this year still looks about right.
Chart 1: GDP Growth
Chart 2: Monthly Hong Kong Tourist Arrivals (mn)
Chart 3: Retails Sales & Consumption (% y/y)
Chart 4: Hong Kong Exports & World GDP (% y/y)
Sources: Refinitiv, CEIC, Capital Economics
Julian Evans-Pritchard, Senior China Economist, email@example.com