Hong Kong runs ahead of the world to jump into the global recession first.

Recession is technically defined as two consecutive quarter-to-quarter falls in real GDP. There have been quite a few large economies that already had a fall in Q2 of 2019, and are waiting for another drop in Q3 before announcing confirmations of the recession. For example, the UK and Germany had -0.2% and -0.1% fall respectively in Q2, and are expected to be negative in Q3. In fact, the International Monetary Fund (IMF) realizes the seriousness of the coming global recession and has just downward adjusted the forecast for the global economic growth of 2019 to just 3.0%, which is the worst since 2007 [1].

Hong Kong government probably leads the world in confirming the recession yesterday by reporting its initial figure of the Q3 GDP! After adjusting seasonal factor, the quarterly growth rates of real GDP for Q2 and Q3 of 2019 were -0.5% and -3.2%, respectively (Figure 1). The annual growth rate has also shifted from positive (0.4%) to negative (-2.9%) (Figure 2), both of which have been the worst since the 2008 global financial turmoil. The government has officially cut its annual economic growth forecast again to negative growth, and the situation in Q4 is pessimistic [2]. However, senior government officials, ignoring the global recession impacts, merely blame the local factors and think that stopping the social unrest will be able to regain the upward trend of the GDP. A wrong prescription may make things worse.

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Figure 1 Hong Kong’s GDP quarterly growth rate 2009Q1–2019Q3. Source: Trading Economics
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Figure 2 Annual Change in Hong Kong’s GDP 2009Q1–2019Q3. Source: Trading Economics

Since the local social unrest started in June, Figure 2 clearly refutes the government’s contention, as it shows that the momentum of economic growth has begun to recede since the first quarter of 2018, and the seven QtQ data points from 2018 to the 3rd quarter of 2019 basically follow the same falling trajectory, and NOT a sudden cliff-like fall since June this year. Undeniably, the anti-extradition movement may have contributed to a certain extent the deepening of the falls in the latest quarter figure, but it can almost be certain that it is NOT the triggering factor of the recession.

If we take a closer look at the figures of the GDP major components, it reflects that we might have dipped into recession even earlier. Figure 3 shows the annual changes in various GDP components. Apart from the continuous increase in government expenditures, all other components have experienced different degrees of slowdown or even decline in the first half of 2019. Among them, the domestic fixed capital formation fell the most, from about 2% in 2018 to about -9% in the first half of 2019, and its Q3 figure further declined from -10.8% in Q2 to -16.3% in Q3 (Table 1), it accounts for about 21.7% of the total GDP of HK (Figure 4). Similarly, the export of goods has already turned around in 2018, and in the first half of 2019, it has turned from a slowdown to a decline, which is very obvious to be the consequences of the US-China trade war and the decline in China’s domestic demand. More importantly, the private consumption component, which accounts for the major portion of the GDP (68.3%, see Figure 4), has also experienced a rapid slowdown in the first half of 2019. Its growth rate has dropped from about 5.5% in 2018H2 to just about 1% in 2019H1. The reasons of the contraction remain to be studied, but the latest figure of private consumption in Q3 is found to continue the falling path, from about 1.3% in the previous quarter to -3.5% in the third quarter 2019 (Table 1). Unlike all other components, the government’s consumption has still been growing, In the first half of the year, there was a growth of government consumption of more than 4%, In the third quarter, the government consumption accelerated to 5.3% (Table 1). It accounts for about 9.9% of economic output (Figure 4). In other words, if the government did not act against the market, Hong Kong should have been in a technical recession one or two quarters earlier.

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Figure 3 Real GDP annual growth rate of various components in Hong Kong, 2013–2019H1. Source: Trade Development Council (2019) [3]
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Table 1 Annual growth rate of various components of Hong Kong’s GDP, comparison of the second and third quarters of 2019, source: Hong Kong Census and Statistics Department [4]
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Figure 4 Contribution Percentage of various GDP components towards Hong Kong GDP in 2018. Source: Trade Development Council (2019) [3]

It can be seen from Table 1 that there have been negative growths in four components in the second quarter of 2019, and except the government spending, all other components’ QtQ changes were only continuing the deterioration from the previous quarter. The impact of the decline in private consumption is the most critical, because it accounts for 68.3% of the total GDP, and thus the GDP growth rate is very close to the growth rate of private consumption.

Retail sales amount should account for a high proportion of private consumption. Figure 5 shows that the retail sales amount dropped from +8.7% in 2018 to -6.0% in January-August this year. Its monthly changes are more revealing in Figure 6. It shows that the Retail Sales Amount has been decreasing since February 2019, and continuing to deteriorate. The latest decline figure in August was a record-breaking figure of more than 20%, but in fact, the decline in February was also a double-digit fall.

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Figure 5 Hong Kong retail sales annual growth rate from January to August 2013–2019, Source: Trade Development Council (2019) [3]
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Figure 6 Annual Change in Hong Kong’s Retail Sales Amount, ​​September 2018–2019. Source: Trading Economics

Therefore, the government must realize that Hong Kong’s GDP growth cannot be achieved simply by increasing government consumption, because it does not only result in wastage, but there have been some studies finding that it will cause counter-effects [5]. In fact, being a highly globalized small economy, Hong Kong is hard to be immune to the global recession. It may also have to accept the fact that GDP cannot be ever-growing. Slowing down a bit can be an opportunity for the city to solve the deep-rooted social problems, such as the disparity between the rich and the poor, the unaffordable housing prices, the unbearable social pressure and the increasing number of suicidal cases, and why Hong Kong is one of the very unhappy cities in the world.

GDP is just a proxy, it does not truly reflect the living standards of the citizens, not to mention about reflecting the happiness and satisfaction of life. It does not pay to pursue blindly a rapid growth of GDP. It puts the city into a kind of car racing game. No one is allowed to slow down, else one would be hit to death. People of Hong Kong are working the longest hours in the world. These are the costs of Hong Kong’s high GDP!

References:

[1] Kreppmeier, L. (2019) These 8 countries will dominate global growth in 2024, says the IMF,Business Insider Oct 30。https://amp.businessinsider.com/these-8-countries-will-dominate-global-growth-2024-imf-says-2019-10?fbclid=IwAR2ItkxV_YZ3rnj02yRhjGtb5O1z06V8npS2nXEjdqkFzIbVb_J3Rt9qmcs

[2] 林祖偉 (2019) 香港步入衰退:示威與貿易戰夾擊,第三季經濟增長十年最差,BBC 10月31日。https://www.bbc.com/zhongwen/trad/business-50234451

[3] HKTDC (2019) Economic and Trade Information on Hong Kong, Research, Hong Kong Trade Development Council, Oct 31. http://hong-kong-economy-research.hktdc.com/business-news/article/%E5%B8%82%E5%A0%B4%E7%92%B0%E5%A2%83/%E9%A6%99%E6%B8%AF%E7%B6%93%E8%B2%BF%E6%A6%82%E6%B3%81/etihk/tc/1/1X000000/1X09OVUL.htm

[4] Census and Statistics Department (2019) Advance estimates on Gross Domestic Product for third quarter 2019, HK Government, Oct 31. https://www.censtatd.gov.hk/press_release/pressReleaseDetail.jsp?charsetID=2&pressRID=4506

[5] Yiu, C.Y. (2019) Global Recession is Imminent, HK Government Launches Unorthodox Measures, Medium, Oct 20. https://medium.com/@edwardyiu/global-recession-is-imminent-hk-government-launches-unorthodox-measures-328be685de51

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