HK must brace for the impact of global economic downturn

The worsening global economic environment shown up by the latest data is posing tougher challenges for the externally oriented Hong Kong economy than what Financial Secretary Paul Chan Mo-po suggested in his earlier budget speech in the legislature.

Any doubts about Chan’s warnings should have been wiped out by the latest move of the European Central Bank’s fresh stimulus which signals that the slowdown of the economies of the 19 countries using the euro is getting worse. With interest rates staying at current low levels, the ECB’s options are severely limited.

Meanwhile, the Chinese central government has just announced a slew of fiscal and monetary measures to stimulate the country’s economic growth, which is expected to slow to 6 to 6.5 percent for 2019, the lowest in nearly three decades. Economists have remained skeptical whether those measures are sufficient to achieve the desired results.

The United States economy is seen to be losing steam as the effect of the tax cuts is wearing out and consumer expenditure, a major growth engine, is not increasing at as crisp a pace as before. These latest developments have prompted the Federal Reserve to take a much more moderate stance in raising interest rates and tightening liquidity.

Japan is still mired in the economic quagmire from which it has tried, without much success, for decades to extract itself. Future growth of the world’s third-largest economy after the United States and the Chinese mainland is widely seen to be hampered by the rapidly aging population, one of the most serious in the world, resulting in a shrinking workforce.

All told, the Organization for Economic Cooperation and Development last week lowered its global economic growth forecast to 3.3 percent from 3.5 percent for 2019 and 3.4 percent for 2020. It cited the trade dispute between the US and China, among other things, for eroding the confidence of businesses and consumers.

Hope that the still robust US economy can serve as the global growth engine was dimmed by OECD’s report which adjusted its projections of US economic growth down to 2.6 percent for 2019 from 2.7 percent. Forecast of US economic growth for 2020 is even lower at 2.2 percent, according to OECD.

Cautioning about the cloud overhanging the Hong Kong economy, Chan projected a growth rate of 2 to 3 percent for 2019, down from above 3 percent for 2018. Indeed, some sectors of the economy, particularly those relating to external trade such as exports and transportation, have already been hit by the mainland’s sluggish manufacturing sector.

The darkening economic outlook has been reflected in the asset markets. Despite the recovery in recent weeks, the benchmark index of Hong Kong stocks lost about 15 percent in the past year, wiping out more than HK$4.5 trillion in market capitalization. Since then, the market has slipped into the doldrums, broken occasionally by mainland-inspired brief rallies.

Property prices began to weaken in August and have since fallen an average of 15 to 20 percent. Since the interest scare began to subside earlier this year, there have been talks about a property market recovery driven mainly by the pentup demand for small apartments with floor areas ranging from 15 to 20 square meters.

But sales of new apartments in some developments have remained sluggish, showing that many prospective home buyers and investors, especially those from the Chinese mainland, have adopted a wait-and-see attitude. Some analysts predicted that average home prices will fall another 10 to 15 percent in 2019 before stabilizing at a reasonably affordable level.

To be sure, Hong Kong had faced worse times before. But this time, the asset market boom in the few years before mid2018 will make the expected economic downturn seem particularly unbearable to many people in this politically charged environment. For instance, the loss of jobs would put many families who recently bought their homes at exorbitant prices in serious financial jeopardy.

Understandably, the government budget has placed particular emphasis on helping small to medium-sized businesses, the largest employer, and job protection through tax relief and other fiscal incentives. In addition, the government can be expected to take an active role in job creation by speeding up the building of major infrastructure facilities, including the airport third runway and public housing.

Unlike other developed economies, Hong Kong is denied the use of monetary tools in economic fine-tuning because of the linked exchange rate system. Neither can it go gung-ho into debt financing to boost economic growth with oversized government spending.

What it has are huge fiscal reserves of more than HK$1 trillion, equivalent to more than two years of government expenditure, which gives it sufficient firepower to pursue an expansionary, to a reasonable degree, fiscal policy. Under what Chan described as a new economic philosophy, that’s exactly what the government is doing.

The author is a veteran current affairs commentator.