Blog
Written in the end of the third quarter of 2019
The third quarter of 2019 will end soon. Although the estimated GDP figures will only be released at the end of October, we should already have an idea of the general picture.
According to the latest statistics published by the Census and Statistics Department, Hong Kong exports have dropped for 10 consecutive months. The value of total exports of goods decreased by 6.3% in August, which is the third month in a row with a drop exceeding 5%. The volume of total retail sales recorded a 6-month consecutive drop from 1.4% in May to 11.4% in July. The figures in August, which will not be favourable given the current situation, are going to be released this Wednesday. Business sentiment has become extremely pessimistic following the series of social incidents. According to the Report of Monthly Survey on Business Situation of Small and Medium-sized Enterprises (SMEs) prepared by the Census and Statistics Department, the current diffusion index on business receipts amongst SMEs declined notably to 32.1 in August 2019, which was the lowest record since June 2011, reflecting the little incentive for investment.
With weak export, retail and investment, it is hard to have high expectation for the economy as a whole. The second quarter GDP recorded a 0.4% quarter-on-quarter negative growth. If the quarter-on-quarter growth in the third quarter continues to be negative, Hong Kong’s economy would technically enter into a recession.
In fact, the shirking global economy and China-US trade conflicts have already caused a slowdown of manufacturing and trading activities in Asia. The reduction of local economic vibrancy together with the recent social incidents have hit the retail and catering sectors. It is noted that the situation of those sectors directly affected have worsened significantly. The total unemployment rate of retail, accommodation and food services sectors reached 4.6%, which is higher than that of the same month last year by 0.7 percentage points, and above the overall local unemployment rate of 2.9%. The decrease in employment of the construction industry is also relatively noticeable. These imply that in general, our labour market is facing increasing pressure.
As part of the relief measures I announced last month, the Employees Retraining Board was tasked to arrange training programmes for unemployed/under-employed workers in affected industries to upgrade their skills and receive allowances upon completion of the programme. Details of this "Love Upgrading Special Scheme" were announced last week. We have also announced the arrangement of principal moratorium for lenders of 80% guarantee product under the SME Financing Guarantee Scheme (SFGS) and the launch of a new 90% guarantee product, with a view to addressing SMEs’ needs and relieve their financing pressure during the difficult times.
Regarding Moody's Investors Service’s decision to adjust the credit outlook of Hong Kong to "negative" from "stable", and Fitch’s downgrading of the credit rating of Hong Kong to "AA" from “AA+” and the outlook to "negative", we do not agree with their assessments. Despite the social incidents in Hong Kong over the recent months, the effective implementation of the “one country, two systems” principle in Hong Kong has not been affected and Hong Kong core competitiveness remains solid. Most importantly, the two agencies acknowledged Hong Kong’s considerable financial buffer, and the stable operation of the financial market as supported by the Linked Exchange Rate System (LERS)
In fact, Hong Kong has all along been working hard to strengthen competitiveness. According to the 2019 ranking published by the International Institute for Management Development (IMD) in Switzerland, Hong Kong ranked No. 8 globally, 3 ranks higher than last year. Hong Kong continued to be the second among Asian economies. For the three key areas analysed in the study, Hong Kong’s ranking on “Technology” and “Knowledge” are No.4 and No.7 respectively. On the area of “Future Readiness”, Hong Kong’s ranking has improved from No. 24 to No. 15.
The current term of Government spares no effort in promoting I&T development, and have committed funding of over $100 billion in the past two years to develop I&T infrastructure, finance research projects and build talent pools. By improving the I&T ecosystem, we can inject fresh impetus to Hong Kong’s economy, and strengthen our innovative and economic capacities.
While we remain positive on the Hong Kong economy in the medium to long term, the short term economic performance is still hindered by unfavourable factors. Decrease in corporate profits will affect the income of Profits Tax. The slowdown in property and stock markets will lead to a lower than expected income on Stamp Duties. On the other hand, for the plot of commercial land in Kai Tak of which the sale had been cancelled earlier, the latest tender was again cancelled as no bids reached the reserve price, adding uncertainties to the annual revenue generated from land sale. In the Budget announced earlier this year, I forecasted a surplus of some $16 billion in the 2019/20 financial year. Yet taking into account the above considerations, and the expenses relating to the recently announced relief measures, there is a chance that deficit may occur at the end of this financial year.
With an increasing downward pressure on our economy, more support to both enterprises and employees is needed. During the difficult times, the Government will not cut spending, but will utilize our financial reserve to implement timely and suitable counter-cyclical measures, so as to stimulate economy and relieve people’s hardship.
September 29, 2019
