(Photo: REUTERS / Bobby Yip)
A general view of the Hong Kong Island skyline is seen from the Peak in Hong Kong in the evening
Hong Kong’s economic growth has stalled in 2011. In the second quarter, economic growth fell 0.4 percent. In the third quarter, it grew 0.1 percent, barely avoiding a technical recession (defined as two consecutive quarters of contractions).
One can argue that it is not Hong Kong’s “fault” that it struggled economically. In the second quarter, its exports plunged “due to supply-chain disruptions in the aftermath of the Japan earthquake,” said Morgan Stanley economists Denise Yam and Ernest Ho.
In the third quarter, its economy was hurt by the global financial storms emanating out of Europe and the U.S.
Hong Kong, however, is one of the most open economies in the world; its economic fortune (on both the supply and demand side) by nature heavily depends on the world at large. Ho and Yam, therefore, warned that more global storms – mostly from Europe and the U.S. – could further derail Hong Kong’s economy.
Recently, however, this international exposure has been buffered to some extent by Hong Kong’s strong domestic consumption.
Even in the third quarter – when some thought the global market turmoil would hurt consumer confidence in Hong Kong’s financially-focused economy – domestic private consumption growth only slowed to 1.1 percent in real terms from the previous quarter.
Yam and Ho credited the improving jobs market (unemployment rate dropped 3.2 percent) and supportive monetary policy (Hong Kong, in some sense, adopts the same loose monetary policy as the U.S. through its currency link) for boosting domestic consumption.
A research note from HSBC credited income growth (which also negates the negative effect of Hong Kong’s relatively high consumer inflation) and strong inflows of (rich) visitors from mainland China as factors supporting Hong Kong-based consumption.
Indeed, the strength of China has bolstered Hong Kong’s economy in multiple ways.
But even for Hong Kong’s domestic economic, downside risks remain.
Yam and Ho said widening income and wealth inequality could lead to social tensions. Moreover, they pointed out that Hong Kong’s entire economy “hinges heavily on asset market performance and prevailing easy monetary conditions.” If capital ever flows out of Hong Kong to other regions, its economy could tank in the near-term.
Hong Kong’s economic outlook is generally positive, given its proximity to China and role as a regional financial powerhouse. However, its economic openness leaves it vulnerable to the risk of economic downturns and financial crises.
Ho and Yam forecast Hong Kong’s real GDP growth (that is, adjusted for inflation) to be 5 percent for 2011 and 4 percent for 2012. While it is below 2010’s real growth rate of 6.8 percent, it is still a solid pace.
Still, they warned that downside risks from abroad could easily derail this attractive pace of growth.
This article is copyrighted by International Business Times, the business news leader