SINGAPORE, February 24, 2020 – Hong Kong’s[1] economy and financial system have remained resilient notwithstanding external headwinds and recent socio-political tensions. Solid macroeconomic fundamentals, a sound financial system, ample fiscal reserves, and good governance have anchored macroeconomic and financial stability despite a sharp slowdown in growth. These strengths will also support the authorities’ efforts to address both near-term risks and long-term challenges ahead. This is according to the 2019 Annual Consultation Report on Hong Kong published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was prepared based on AMRO’s Annual Consultation Visit to Hong Kong from July 29 to August 2, 2019, and data and information available up to early February 2020.
Real GDP growth weakened sharply from 2.9 percent in 2018 to -1.2 percent in 2019, reflecting stiff external headwinds stemming from the U.S.-China trade conflict and the impact of domestic socio-political tensions. For 2020, growth is expected to come in at -0.2 percent, with the lingering of domestic tensions and more recently, the effects of the outbreak of the COVID-19 virus in mainland China. External headwinds arising from the US-China trade conflict have been a drag on growth in the ASEAN+3 region, and Hong Kong – as a trade hub – has been affected. At the same time, socio-political tensions and uncertainty related to the COVID-19 virus outbreak are weighing heavily on economic sentiments and exerting a drag on both consumption and investment. Inflationary pressures have increased moderately due to supply-side factors, but remain contained.
To shore up growth and confidence, the authorities enacted three rounds of fiscal support measures in H2 2019, amounting to nearly 1.0 percent of GDP, augmenting the moderately expansionary fiscal policy stance announced at the beginning of 2019. Recently, Hong Kong Monetary Authority (HKMA) also stepped up measures to support small and medium-sized enterprises (SMEs) financing, including a reduction in the Countercyclical Capital Buffer, and an establishment of the Banking Sector SME Lending Coordination Mechanism. At the same time, the Hong Kong government has strengthened its efforts to address the complex issues underlying the socio-political tensions.
Alongside this, labor market conditions are expected to remain stable. Overall labor market conditions remain fairly tight for now, although employment growth has weakened. The unemployment rate has increased moderately to a still-low 3.3 percent. At the same time, overall wage growth has remained firm. However, employment growth has turned negative as a few key sectors, especially trade and wholesale, have been shedding jobs.
The pullback of cross-border trade and the ongoing U.S.-China trade conflict remain key sources of uncertainty and risks for Asia and Hong Kong. Should the trade conflict re-escalate, the impact on Hong Kong could be substantial because of its large and growing trade-related services.
Apart from this, other key risks to Hong Kong’s growth outlook would be a sharp slowdown in mainland China’s economy, a continuation of the socio-political tensions, and a prolongation of the COVID-19 outbreak.
Hong Kong has strong macro fundamentals and ample fiscal reserves, and is well prepared to cope with cyclical and structural challenges. The Linked Exchange Rate System continues to function smoothly, and market confidence in the system remains strong. The financial sector is sound, with strong capital and liquidity buffers serving as an anchor of resilience. Hong Kong’s healthy fiscal position provides ample room for policy measures to support enterprises and the workforce, and sustain robust growth.
Hong Kong’s policymakers should continue to take measures to mitigate the impact of near-term headwinds while pressing on with efforts to address structural challenges and socioeconomic inequality. The authorities should consider enhancing fiscal and other measures to support firms and workers affected by the economic downturn. The authorities should also take policy measures to diversify the economy, spur technology development, keep the labor market flexible, and further strengthen social welfare and healthcare support amid rising challenges from an ageing population. For the property market, the authorities should continue to step up efforts to increase the supply of land and provision of housing, especially affordable housing for lower-income groups.
Hong Kong should continue to play an important role in facilitating China’s continued reform and opening-up as well as its outreach to other emerging market economies. The Greater Bay Area development and the Belt and Road Initiative both provide good opportunities for Hong Kong to contribute and to benefit.
The recent introduction of virtual banking and continued development of fintech will help the financial sector enhance its competitiveness by leveraging on the digital technology to improve upon and expand its services.
Hong Kong should continue to support the development of green finance, leveraging on its strengths as a leading green finance hub in the region. The recent introduction of key measures on sustainable banking and green finance by the HKMA will boost awareness and development of Hong Kong’s green finance market.
[1] For brevity, “Hong Kong, China” is referred as “Hong Kong” in the text.
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About AMRO and AMRO’s Annual Consultation Report:
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralization (CMIM), and provide technical assistance to the members.
The Annual Consultation Report was prepared in fulfilment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.