Hong Kong’s economy is in danger of further contraction

Alicia Garcia Herrero, Natixis Asia Pacific Chief Economist, Bruegel Senior Fellow

Approaching the end of a volatile year, Hong Kong continues to face the triple whammy of slower growth in mainland China, the trade war uncertainty and social unrest.

While the former two external risks are not in the hands of Hong Kong and are subject to global development, the escalated social unrest and the lack of fiscal stimulus are bringing a higher downside risk to economic growth (Chart 1).

Housing Is a Critical Issue

From the priorities chosen, the Hong Kong government concluded that housing and land support are the most urgent issues to be tackled in the short run. However, there is still a lack of creativity and boldness in its solutions. The share of public to private housing has increased to 70:30 from the previous 60:40 target. The reality is that the shift toward more public housing cannot happen without a major increase in land supply, and solid quantities and deadlines for additional land supply are absent from the policy address.

The Land Resumption Ordinance will be invoked to supply more units for public and starter homes. More details will also be provided for the Land Sharing Pilot Scheme, which was announced last year to provide incentives for a mix of public and private housing with developers.

But significant progress is needed based on the projection by the government before the policy address. An average of 31,500 public units are needed per annum based on the most recent Long Term Housing Strategy, but there is clearly a shortfall in the current pipeline.

Social Unrest Hitting Retail and Tourism

The current dilemma means it is hard to foresee a quick fix for the unrest. As such, the outlook for the most affected sectors, such as retail and tourism, will continue to be challenging (Chart 2).