THERE IS LITTLE to surprise in the International Monetary Fund’s newly published Article 4 report on Hong Kong. The impact of the tariffs wars between China and the United States, the slowdown in China and the world’s economy and months of social unrest have all hit the city’s exports, investment and consumption. The Fund is forecasting a 1.9% contraction of Hong Kong’s economy for 2019 and a cyclical recovery of 0.2% in 2020, with the risks all to the downside.
On the external side, further escalation of trade tensions between the U.S. and China and a significant slowdown of Mainland China as well as additional barriers, including potential restrictions by the U.S. against China in technology and the financial sectors, could negatively affect growth in Hong Kong SAR. On the domestic side, a deterioration of the sociopolitical situation and delays in addressing structural challenges of insufficient housing supply and high income inequality could further weaken economic activity and negatively affect the city’s competitiveness in the long term. A significant slowdown of the economy could trigger an adverse feedback loop between house prices, the real economy and the financial sector.
Beyond next year, the Fund sees a sub-par recovery as ‘increased trade barriers and disruptions to global supply chains would be a drag on trade-related activities’.
Prescriptive measures include more countercyclical fiscal support, such as the recent stimulus targeted at the most vulnerable households and small- and medium-sized enterprises. The Fund would like to see a medium-term fiscal package that would address longer-term structural challenges associated with housing market imbalances, the ageing population and income inequality. Tax reform should include phasing out the new residential stamp duty once systemic risks from non-resident inflows dissipate, the Fund says.
The Fund also underscored the importance of Hong Kong’s financial markets to continue to function smoothly in the face of external and domestic headwinds. Despite everything, the new-listings-boosted Hang Seng Index appears on track to end this year higher than where it started it, albeit below its April high.