Irina Fan Senior Economist irinafan@hangseng.com Joanne Yim Chief Economist joanneyim@hangseng.com 22 December 08 The Hong Kong Economy in Contraction Mode Hong Kong is in recession and leading economic indicators suggest that the outlook is gloomy. Hong Kong s external sector is likely to absorb greater shocks than the last Asian financial crisis as the impact of the current financial tsunami is global rather than regional. However, the Hong Kong government s fiscal stimulus, infrastructure projects and the Mainland factor may offer some buffers to domestic demand and the job market. The property market would also be more resilient due to relatively tight supply and more favourable affordability, which may mean less severe contraction in consumer spending. That said, government efforts are unlikely to have any major impacts until the second half of 09 at the earliest. As such, we have revised down Hong Kong s 09 GDP forecast from no growth to a contraction of 3%. Looking further ahead, the local economy is not expected to stage a strong rebound until the second half of 10. We therefore see only a mild growth of 2.0% for the full year of 10. Exhibit 1 yoy % 10 8 6 4 2 0-2 -4-6 -8 GDP Growth and CPI Inflation 98 00 02 04 06 08 F 10 10 8 6 4 2 0-2 -4-6 -8 Real GDP CPI Source: Hang Seng Bank, CEIC F yoy %
Warnings from Leading Indicators The Hong Kong economy is in recession. The question being asked now is how deep the recession will be and how long it will last. The local stock market index, the Hang Seng (HSI), which leads economic activities by three to six months, seems to suggest that the latest recession could be as bad as that during the 1997 Asian financial crisis, when the Hong Kong economy contracted by 6.5% in 1998. Another leading indicator, the Hong Kong Purchasing Managers (PMI), also signals trouble ahead. The November PMI fell for a fifth straight month to 38.3, the lowest level since May 03 when the territory was hit by SARS. Exhibit 2 Exhibit 3 % % More Negative External Sector In terms of sectors, external demand is likely to be particularly weak. The OECD leading indicators point to a sharp contraction in economic activities in the industrialized countries, indicating waning demand from Hong Kong s major export markets. The IMF s latest forecast also sees the volume of the world s imports contract 2% in 09 under the double whammy of credit crunch and global recession. In fact, many of the major economies are already in, or near recession, as the financial crisis sent shockwaves throughout the world. The situation is worse than that during the 1997 Asian financial crisis when countries outside of Asia maintained growth momentum. The National Bureau of Economic Research declared that the US entered into recession in December 07. Other countries, including the EU, Japan and many Asian economies also slid into recession in the third quarter. According to the latest IMF forecast, the world economy is expected to grow a mere 2.2% in 09, and major industrialised economies would contract by 0.25%, marking the first annual contraction for this group of countries in the post-war period. 2
While many have compared the latest global economic downturn to that of the Great Depression era, current situation seems less severe. In contrast to the 19s episode, central banks and governments around the world have been more proactive. They have been quick in implementing aggressive measures to stabilise financial markets and revive growth. Nevertheless, the current recession is still likely to be prolonged, not only because many countries are affected, but also because financial institutions are badly impaired. According to a study by the IMF, financial sector-led recessions tend to be more prolonged. During Japan s financial crisis in the 19s, the losses of financial institutions were as large as 15% of the country s GDP. This plunged Japan s economy into a recession which lasted over a decade. The IMF estimated that the US subprime-led financial tsunami could lead to financial sector losses of as much as USD1.4 trillion, or about 10% of US GDP. It is therefore likely to take a long time for financial institutions to repair their balance sheets and the deleveraging process would do great damage to the global economy. Exhibit 4: World Economic Outlook (%) 06 07 08F 09F World GDP 5.1 5.0 3.7 2.2 US 2.8 2.0 1.4-0.7 Euro zone 2.8 2.6 1.2-0.5 Germany 3.0 2.5 1.7-0.8 UK 2.8 3.0 0.8-1.3 Japan 2.4 2.1 0.5-0.2 Source: IMF World Economic Outlook Update, November 08 Less Negative Domestic Demand Despite the poor outlook for the global economy and Hong Kong s exports, the domestic sector might be less severely affected for a number of reasons. The government s economic stimulus package Like its counterparts around the world, the Hong Kong government also took measures to stimulate domestic demand, which may provide some buffers to the sharp contraction in external demand. The government s tax rebates and other concessionary measures and infrastructure projects are estimated to help boost Hong Kong s GDP growth by about 0.8% and 1.0% in 09 and 10 respectively and create about 50,000 jobs each year, lending support to consumption. 3
Exhibit 5: Major Economic Stimulus Packages Measures HKD50 billion tax rebates and other concessionary measures launched in Feb and July HKD1 billion, infrastructure projects from 10-15, assuming the start date of some projects to be brought forward to 4Q 09 HKD billion government projects for FY09/10 Source: Hang Seng Bank, 08/09 Policy Address, 08/09 Budget Estimated effects 08 09 10 GDP: +0.5% GDP: +0.5% ----- ----- GDP: +0.3% Job creation: 50,000-,000 GDP:+1.0% Job creation: 50,000 The Mainland factor Hong Kong is likely to benefit from its closer economic integration with the Mainland which is still expected to maintain a steady pace of growth of around 8%. While Hong Kong may not be able to gain directly from the RMB4,000 billion stimulus package announced by the Mainland authorities in November 08, the maintenance of growth momentum in mainland China will lend support to Mainland consumers, many of whom will visit Hong Kong on holidays. In fact, Mainland tourist spending accounted for about 19% of total retail sales in 07, compared with 5.8% in 1998. Asset Market Reactions The property sector, which is expected to fare better than that during the 1997 Asian financial crisis, is another factor which contributes to a less negative outlook for domestic demand in Hong Kong. Let s take a closer look at Hong Kong s major asset market downturns and economic cycles. While the property market went through a 6-year long downturn from 1997-03, the local stock market experienced two, and the economy five, major cycles during the period. Exhibit 6: Asset Market Reaction to Economic Downturn Property 1981-84 1997-03 07-present Stock 1981-82 1997-99 00-03 07-present Economy 1981-83 1997-99 00-02 02-03 07-present Causes Confidence crisis: handover of Hong Kong Asian financial crisis Dot.com bubble plus US 911 attack SARS Global financial tsunami 4
Exhibit 7 Exhibit 8 Hang Seng (rebased) 1 1 1 81-82: -62.6% (18 mths) 97-98: -.1% (13 mths) 07-08: -65.2% (13 mths) 05 06 07 08 09 10 11 12 Apr05- ec08 Feb95-Oct03 Jan77-Feb82 Source: CEIC, Hang Seng Bank 1 1 Property Price (rebased) 05 06 07 08 09 10 11 12 13 14 15 16 3Q94 to 4Q05 4Q79 to 4Q86 2Q05 to 3Q08 1 110 90 70 50 30 Source: CEIC, Hang Seng Bank Based on past experience, the present sell off in the stock market has gone a long way already, though it is unsure whether the bottom has been reached. Nevertheless, even if market has hit bottom, do not expect a strong rebound anytime soon. In the 1981-84 cycle, the stock market stayed close to the bottom for two years. On the other hand, the property price adjustment seems to be just beginning. But, the property market is likely to be more resilient than a decade ago as flats are more affordable now, interest rates are at, and likely to stay near, low levels for a long while. Supply of residential units is also relatively tight. Exhibit 9: Hong Kong Major Property Downturn 1981-84 1997-03 07-Present Property Prices Peak to trough (whole -32.1% -65.0% -11.0% At peak 21.2% (3Q81) 31.9% (3Q97) 21.1% (2Q08) At trough -6.7% (3Q84) -8.9% (3Q03) Latest: 3.9% (Oct08) Duration 13 quarters 25 quarters 2 quarters Affordability* At property peak 151.8 (2Q82)** 166.3 (3Q97) 89.1 (2Q08) (if HH income=hkd35,000) 88.8 (3Q97) 43.1 (2Q08) 12-month ago n.a. 125.0 (3Q96) 90.8 (2Q07) 12-month later 127.5 (3Q82) 146.3 (3Q98) Latest: 81.6 (3Q08) Interest rates trend Rising Rising Falling Mortgage rates At property peak 16.7% (2Q82) 9.3% (3Q97) 2.75% (2Q08) 12-month ago --- 9.8% (3Q96) 4.85% (2Q07) 12-month later 14.5% (3Q82) 11.5% (3Q98) Latest:3.0% to 5.0% (Dec08) Supply of residential units Completed units 33,475 (81) 18,2 (97) 25,790 (00) 26,397 (03) 3,000 (Jan-Sep08) Primary transactions n.a. n.a 16,676 (00) 26,498 (03) 9,671 (Jan-Sep08) Add to/run down on existing stocks n.a. n.a 9,114 (00) -101 (03) -6,671 (Sep08) Accumulated completed & unsold units n.a. n.a. n.a 22,000 (1Q03) 3,329 (Sep08) Note: *70% bank financing, 0sqf HK island flat, **earliest available number The higher the index, the less affordable the flat purchase. Source: Hang Seng Bank, CEIC, Midland Property Agency 5
Exhibit 10: The Then and Now 1997-98 Asian Financial Crisis 07-08 Global Financial Tsunami External demand Area outside Asia remained intact Global recession => more negative on trade Domestic demand Consumption Consumption Sharp correction of stock & property More resilient property market market Mainland tourists offer buffers Tax rebates and other concessionary Investment High interest rate Government spending restrained government spending Overall GDP contracted 8.1% in the worst quarter measures Investment Low infrastructure Infrastructure projects Government spending expansionary fiscal stimulus => less negative on domestic demand Forecast for 09 and 10 Against such a backdrop, Hong Kong s external sector is likely to absorb greater shocks than the Asian financial crisis, but the swift and coordinated efforts of central banks and governments around the world should help avoid the return of a Great Depression. Local government s fiscal stimulus, infrastructure projects and the Mainland factor will offer some buffers to domestic demand. The more resilient property market will also bring less severe contraction in consumption spending. That said, government efforts are unlikely to have any major impacts until the second half of next year at the earliest. As such, we have revised down Hong Kong s 09 GDP forecast from no growth to a contraction of 3%. We believe the local economy is unlikely to stage a strong rebound until the second half of 10 at the earliest to give a mild growth of 2.0% for the full year of 10. Exhibit 12: Hong Kong Economic Forecast 1997 1998 1999 00 07 08F 09F 10F Real GDP 5.1-6.0 2.6 8.0 6.4 3.0-3.0 2.0 Consumption 5.5-5.5 1.2 5.1 7.8 2.5-3.6 1.2 Investment 13.7-7.6-16.7 7.9 4.2 4.6-5.5-2.7 Government 2.2 0.5 3.1 2.0 2.3 2.1 3.5 3.5 Exports of goods 6.0-4.6 3.6 16.9 7.0 3.2-5.9 2.4 Imports of goods 7.3-6.9-0.1 18.4 8.8 3.6-6.8 2.2 Exports of services -0.8-3.9 8.9 13.4 12.5 6.4-3.9 4.6 Imports of services 4.6 2.8-3.4 2.2 8.5 3.7-2.5 2.6 CPI 5.8 2.8-4.0-3.8 2.0 4.5 1.0 1.0 Unemployment 1.9 4.7 6.3 5.0 4.0 3.5 5.4 5.7 Source: Census and Statistics Department, Hang Seng Bank 6
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