Hong Kong’s economy was treading water at the end of 2020 as the re-imposition of containment measures weighed on consumption. Unless authorities bring the ongoing outbreak under control soon, the recovery is at risk of going into reverse this quarter.
Recovery sputters due to renewed virus outbreak
- Hong Kong’s economy was treading water at the end of 2020 as the re-imposition of containment measures weighed on consumption. Unless authorities bring the ongoing outbreak under control soon, the recovery is at risk of going into reverse this quarter.
- GDP growth slowed from 2.8% q/q in Q3 to just 0.2% last quarter. The pace of year-on-year contraction narrowed from -3.6% to -3.0%, but that was largely due to a weaker base for comparison from the protests in 2019. It was a smaller improvement than most had expected (the Bloomberg median was -1.9%, our forecast was -1.0%). (See Chart 1.) For 2020 as a whole, GDP contracted 6.1%.
- The weakness was all in private consumption. It declined 7.6% y/y, only a marginal improvement from the 8.2% y/y contraction in Q3 despite much more favourable base effects.
- The breakdown for the rest of the economy, which was not directly affected by the new containment measures, was much healthier. Investment growth turned positive in year-on-year terms for the first time since 2018, rising to +2.6% y/y after a 10.9% decline in Q3. Growth in government spending dropped back slightly, from 7.1% y/y to 5.6%, but remained supportive. Growth in goods exports picked up from 3.9% y/y to 5.6%, with the authorities pinning much of the strength on demand from the mainland.
- The near-term outlook has darkened as it is taking longer than had been hoped to bring this fourth wave of infections under control. The current containment measures are the strictest so far, with restrictions from last summer reimposed alongside two rounds of localised lockdowns. High frequency data suggest that consumer activity has weakened again early in 2021. (See Chart 2.)
- The near-term outlook therefore hinges on infection numbers. With recovery delayed, we are lowering our growth forecast for this year from 8.0% to 5.5%. That forecast still assumes though that output rises strongly over the rest of the year (the consensus before today’s release was for 2021 growth of 4.7%). There is ample spare capacity. GDP in Q4 was still 6.5% below the pre-protest peak in Q1 2019 while retail sales remain around 20% below pre-protest levels.
Chart 1: Hong Kong GDP Growth
Chart 2: CE Hong Kong COVID Mobility Tracker
(%-change from pre-crisis baseline)
Sources: CEIC, Refinitiv, Capital Economics