Decimated by the triple whammy of lingering trade frictions between the world’s two largest economies, the COVID-19 pandemic and a deglobalization trend, Hong Kong’s economy shrank a record 6.1 percent in 2020.
Economic experts are not forecasting a quick turnaround. US-based credit rating agency Moody’s Investors Service warned in a report in January that even though Hong Kong’s economic situation may turn a corner this year, the level of recovery may not revert to that of 2019 due to sustained pandemic-related constraints.
OCBC Wing Hang Bank economist Carie Li Ruofan expects the special administrative region’s economy to grow just 3 to 5 percent in 2021, as the positive factors of a resilient financial market, trade activities, and the mass COVID-19 vaccination campaigns at home and overseas will be offset by bankruptcies and rising unemployment in the first half, as well as the possible unwinding of broad-based relief measures.
The government expects the city’s economy will grow by 3.5 percent to 5.5 percent in real terms in 2021, Hong Kong’s Financial Secretary Paul Chan Mo-po said in his annual budget speech on Feb 24, citing the latest internal and external situations as well as the stimulus effect of the fiscal measures. In the medium term, the economy will grow by an average of 3.3 percent per annum in real terms from 2022 to 2025.
The four main components of economic growth — local consumption, private investment, government expenditure and exports — will mirror varying degrees of recovery this year.
Private consumption expenditure tumbled 10.2 percent, government consumption expenditure slipped 7.8 percent, and gross domestic fixed capital formation fell 11.6 percent in 2020, according to the Census and Statistics Department. Total exports of goods fell 0.3 percent while total exports of services plunged 36.8 percent.
As for domestic consumption, it is seen to depend on the effectiveness of the vaccination drive as it could lift consumer confidence and mean more jobs and wage increases.
“This year’s major headwinds in economic growth are mounting unemployment and the associated sluggish wage growth,” said Tang Heiwai, a professor of economics at HKU Business School and associate director at the Hong Kong Institute of Economics and Business Strategy.
Hong Kong’s unemployment rate hit 7 percent — the highest in nearly 17 years — for the three months from November to January, compared with 6.6 percent in the previous quarter, with almost 253,300 people out of work. Retail sales value dropped for the 23rd consecutive month in December and plummeted more than 24 percent in 2020 from the previous year.
Myriad uncertainties
“Even if consumption expenditure rebounds, it won’t be high as consumer behavior has changed due to the pandemic. People now opt for takeaway food, groceries and housing appliances rather than dining out or going shopping as they prefer staying at home to avoid getting infected,” said Tang.
Political and policy uncertainties created by the spread of the coronavirus have sapped the confidence of private businesses, with more local companies closing down, curtailing investment growth.
“Hong Kong saw a difficult start to 2021 with business activity slumping as enterprises struggled to keep themselves afloat at home and overseas. Domestic demand and export sales sank sharply, while delays in supplies rose at an unprecedented rate, and worries about further waves of the virus hit companies’ confidence in the near-term outlook,” said Chris Williamson, chief business economist at IHS Markit, a global business information service provider.
Hong Kong will fork out a financial stimulus package of HK$120 billion (US$15.38 billion) for the 2021/22 financial year to shore up the beleaguered economy battered by the COVID-19 pandemic after throwing a HK$318 billion lifeline last year.
The trade sector is expected to pick up this year, but the outlook will depend on whether the Chinese mainland will strengthen relations with other major economies, and whether a vaccine-induced global economic recovery will spur regional trade and external demand.
Although Hong Kong’s economy is tipped to rebound in 2021, the four economic growth engines have shown various degrees of slowing in the last decade, warranting closer attention from the government.
A lifting of travel bans can be expected following the vaccination campaigns, enabling the tourism sector to recover. However, until global mass vaccination programs can lead to the lifting of all travel restrictions, tourism’s contribution to Hong Kong’s economic growth will still be volatile.
Hong Kong’s trade and logistics sector has been diminishing rapidly, with the city’s role as the mainland’s export intermediary waning since China’s admission to the World Trade Organization in 2001, according to the Hong Kong Economic Policy Green Paper, jointly prepared by HKU Business School and the Hong Kong Institute of Economic and Business Strategy.
As the four major pillars falter in varying degrees, economists have proposed recipes for rekindling Hong Kong’s long-term competitiveness — ramping up investment in education and talents, fostering the reindustrialization initiative, leveraging the macroeconomic backdrop of the Guangdong-Hong Kong-Macao Greater Bay Area, and capitalizing on closer regional trade integration provided by the Regional Comprehensive Economic Partnership — the world’s largest free trade pact signed in November last year.
Regarding education and talents, the HKU Business School and HIEBS report highlighted that the Hong Kong government’s education expenditure accounted for 3.3 percent of the city’s GDP in 2018, which is still much lower than the average 5.1 percent of that of the Organization for Economic Cooperation and Development countries.
The Hong Kong government needs to double human-capital investment within five years, the report urged. Besides increasing education expenditure, attracting talents is a critical need, particularly the supply of mid-level skilled science and technology personnel.
The Bay Area’s macroeconomic roadmap offers Hong Kong its future economic growth engine. The Bay Area, comprising Hong Kong, Macao and nine cities in Guangdong province, is an emerging city cluster integrating more than 72 million people and a combined GDP of US$1.7 trillion.
New growth engines
Tao Zhigang, associate dean (human resources) of HKU Business School and HSBC professor in global economy and business strategy, said the markets of Hong Kong and other 10 cities in the Bay Area could form a single market.
“Hong Kong companies like Octopus and HKTVmall are good companies. If they have the Bay Area market, they will grow faster and will have better ecosystems. When the market is big, entrepreneurs will have more incentive to develop the ecosystem,” said Tao, referring to the many different goods and services that stored-value smartcard operator Octopus and online retailer HKTVmall need to do business.
Tang argued that closer integration between Hong Kong and the Bay Area can narrow the wage differential that could foster labor mobility within the city cluster area, thus restoring the competitiveness of the labor market in due course.
Hong Kong should also not miss out on the business opportunities arising from the closer trade links with the Asia-Pacific region provided by the RCEP. The SAR should leverage its experience and talents in services trade, such as supply chain management and export financing, in adapting to the new business model of trade and logistics.
Hong Kong’s re-exports have contributed a lot to mainland exports, but the ratio for imports is very low, and imports are mainly concentrated on production goods. Hong Kong should not only participate in the international market in helping the mainland to export to Europe and the US (external circulation in China’s “dual circulation” strategy), but also help the mainland to import consumer goods (internal circulation).
“Hong Kong is privileged as the bridge of internal circulation and external circulation and can do something in between. We should understand what mainland consumers like to have and what the world has to offer to the mainland. This is the competitive advantage the city needs to seek — understanding mainland consumers and knowing the world’s producers,” said Tao from HKU Business School.
He urged the Hong Kong government to expand its established international links by opening more trade promotion offices in Asia, and nurturing local talents that can deeply understand the Asian market.
“The two key steps are training and attracting talents, and sending talents in different parts of Asia to study various consumer markets in depth, as well as providing platforms for the world,” Tao said.
