Hong Kong on brink of recession as trade war, political protests escalate

Hong Kong is on the verge of its first recession in a decade as increasingly violent anti-government protests scare off tourists and bite into retail sales in one of the world's most popular shopping destinations.

The economy shrank 0.4% in April-June from the previous quarter, revised government data showed on Friday, and conditions have sharply deteriorated since then as demonstrations spread, closing the airport at one stage and paralysing prime shopping areas.

The Asian financial centre, which also has one of the world's busiest ports, was already under intense pressure from the escalating Sino-U.S. trade war and China's biggest economic slowdown in decades.

The city's government confirmed on Friday it was slashing its full-year 2019 growth forecast to a range of 0%-1% from the previous 2%-3%, which it had flagged a day earlier when it announced a modest economic support package.

The quarterly contraction in gross domestic product (GDP) was slightly worse than an initial estimate of -0.3% released just a few weeks ago, and pointed to a sharp deceleration from 1.3% growth in the first quarter.

Two successive quarterly contractions would meet the standard definition of a recession.

Months of increasingly hostile confrontations between police and protesters have plunged the international business hub into its worst crisis since it reverted from British to Chinese rule in 1997.

While official data has yet to fully reflect the impact of the latest violence, a private survey by IHS Markit found business activity in Hong Kong contracted for the 16th straight month in July, falling to a level not seen since March 2009.

"The recent local social incidents, if continued, will cause significant disruptions to inbound tourism and consumption-related economic activities, further dampen economic sentiment, and even hurt the reputation of Hong Kong as an international financial and business centre," government economist Andrew Au said in a statement.

The government also expects exports to remain sluggish or even weaken further in the coming months. Washington is imposing more tariffs on Chinese imports from Sept. 1, though the two sides are still in talks.

"It would still be difficult for (them) to reach a trade deal in the near future given their deep differences across a range of issues," Au said.

The economy expanded 0.5% in the second quarter from a year earlier, its slowest pace since the 2008/09 global financial and down slightly from an initial reading of 0.6% and the first quarter's 0.6% pace.

CANCELLING TRIPS

Hong Kong's leader Carrie Lam said last week the economic impact on the city threatened to be worse than the 2003 SARS outbreak or the 2008 financial crash, both of which triggered sharp downturns.

Tourists are cancelling hotel bookings and some retailers are reporting heavy declines in business. Hong Kong is a key market for many global luxury brands and items such as Swiss watches, and retail sales fell for a fifth straight month in June.

Flights were halted at Hong Kong's airport, one of the world's busiest, for two days this week as demonstrations escalated, and the city's benchmark share index sank to seven-month lows.

The protests began as opposition to a now-suspended bill that would have allowed suspects to be extradited to mainland China. They have since swelled into wider calls for democracy in the city, which is a special administrative region of China.

Flag carrier Cathay Pacific said last week that inbound forward bookings to Hong Kong had fallen by double digits. A growing number of countries have issued travel advisor to their citizens amid the growing civil unrest.

Business disruptions could push Hong Kong into a recession this quarter, according to Capital Economics, noting confidence has also started to sour in the high-flying property market.

It expects GDP to fall 1% in July-September from the previous quarter.
"In the extreme case of military intervention by the mainland, Hong Kong’s economy would face a deep contraction," the consultancy said in a note to clients this week.
"But even assuming this never materialises, the growing threat of such action could be enough to spark capital flight."

That would put the Hong Kong dollar under pressure, but is unlikely to break the currency's long-standing peg to the U.S. dollar, it added.

More mass demonstrations are expected through this weekend, with neither the protesters nor the government showing any signs of giving ground.