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Hong Kong’s Recovery Slowed, Fundamentals Remain Strong

Hong Kong’s Recovery Slowed, Fundamentals Remain Strong

Hong Kong’s economic growth this year should be lower than the expected 5.1% as economic performance in the first three quarters all missed their mark, falling slightly short of projected estimates.

The official growth forecast for the full year is now narrowed to 4% to 5% while economists see an expansion of around 4%, which is still a very respectable figure.

This is consistent with the generally dim global economic outlook, despite the Asia-Pacific region possessing healthy fundamentals and remains a critical economic growth engine for the world, this momentum is weaker than previously anticipated as the region’s largest economy, China, should post a revised growth of 5.4% next year according to the International Monetary Fund.

Inflation remains high, especially among western countries, and the geopolitical uncertainties such as the ongoing Ukrainian conflicts and intensifying Israeli-Palestinian crisis add to inflationary pressures on agricultural produce and energy, contributing to inflated production costs across the western world; on the other hand, Asian inflation remains tamed and should return to central bank targets next year.

The Hong Kong Monetary Authority recently kept base rate steady, following the US Federal Reserve’s decision not to change interest rate. Yet this is just small reprieve for most businesses and borrowers as the already high rates have impacted Hong Kong’s economic sentiment and recovery.

The pickup in tourism has contributed to consumption, but this is hedged by local homeowners having to reach deeper into their pockets to pay increased mortgage bills. Moreover property developers cannot clear their growing inventory, with smaller developers and those with high debt ratios under particular pressure to generate sales and cashflow to lower debt and interest payments; yet the uncertainties of a high-interest rate environment deter many investors from buying into this market, especially as negative equity cases are at a new high with over 11,000 cases currently, although not as severe as in 1997 and 2003. All this exerts significant dampening effect on one of Hong Kong’s core sectors, thus impacting the entire economy.

Since the conclusion of 2021, average property prices have fallen by 14% and total sales volumes by almost 40%, no major reversal of trajectory is expected in the foreseeable future.

Adding to the worries is the city’s investment has fallen in recent years, in 2018 investment was 21.8% of GDP, it is now 16.5% for H1 2023. Perceived political issues, demographic problems – aging population and shortage of talents, three years of pandemic as well as high interest rates have all depressed investment activities.

The economic dictum demographics is destiny remains as relevant as ever, and demographics is one area the government has proactively addressed. The government’s talent attraction campaign has netted noticeable result, with over 100,000 applications approved and with the majority of talents coming from the Mainland, a good development; there are also the plan and a new investment fund to promote local innovation, digitalization and technology development, how big a positive impact will remain to be seen.

The issues and challenges at hand should not distract from the reality that Hong Kong is recovering after a few dramatic years, and since the city’s economy is closely tied to China’s, eventual and steady recovery north of the border, especially growth of the Greater Bay Area, is fuel to Hong Kong’s economy engine. And despite the persisting macroeconomic and geopolitical uncertainties, the government has both the resources and discipline to deal with present and future challenges. Hong Kong maintains a strong liquidity position, with fiscal reserves at 26% of GDP or HK$763 billion, a substantial bulwark to help absorb further shocks as the economy returns to health.