(Bloomberg) — Hong Kong’s economy recorded its worst quarter in more than two years as weak demand and pandemic isolation battered the financial hub and increased the likelihood the city will end the year in contraction for the third time since 2019.
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Gross domestic product plunged 4.5% in the July-to-September period from a year earlier, according to advance estimates released by the government on Monday. That was far weaker than economists’ forecasts for a 0.8% decline, and worse than the second quarter’s 1.3% fall.
It was also the third consecutive quarter of contraction, and the worst drop since the second quarter of 2020.
“It’s almost a done deal that Hong Kong will be in a recession this year,” said Gary Ng, an economist at Natixis SA. He said the third quarter’s steep drop seemed due to unexpected pressure on the property sector, as well as flat consumption and a collapse in trade.
Home prices have fallen this year as demand slides, and the city is bracing for an even deeper slump in coming months as interest rates rise. Investment plummeted more than 14% in the third quarter, far worse than earlier declines in 2022.
“It’s actually quite surprising because in the first quarter, everything was closed down and the pressures came from the consumption side,” Ng added. “This time around, the worry is that the pressure is from everywhere.”
The city’s economy has been under strain for months from the global slowdown and trade disruptions with China because of Covid Zero, along with a talent exodus from more than two years of local virus restrictions and political turmoil. Tightening monetary policy — the city has followed the US Federal Reserve’s interest rate hikes because of the local currency’s peg to the dollar — has also taken a toll on the city’s growth.
The government blamed the fall on a worsened external environment — including the aggressive rate increases — along with disruptions to cargo flows along its border with China, a spokesman said in a release accompanying the data.
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While the third quarter’s drop was steep, it largely recorded activity before the city rolled back its most severe Covid restrictions, including hotel quarantine. Toward the end of September, Hong Kong moved to scrap that requirement, its most substantial step so far to raise the city’s competitiveness as much of the rest of the world has shifted to living with the virus.
The recent relaxation of those arrangements for inbound visitors “should help exports of services,” the government spokesman said in Monday’s release.
Chief Executive John Lee announced a raft of measures in his policy address earlier in October aimed at wooing back foreign talent and easing property pressures, but economists and investors have said the proposals fell short of major policy reform. Another pressure point is the city’s budget shortfall, which may triple this year from earlier estimates.
“The Hong Kong government is not in a very good fiscal situation and obviously if that continues, it will need to issue more bonds, or if home prices continue to fall, it’s very hard for them to sell as much land,” Ng of Natixis said, adding that a recovery will be difficult without further relaxing stamp duty measures or fully reopening the border.
And officials acknowledged that global headwinds will continue to challenge the recovery for the economy.
The “markedly deteriorating external environment will continue to pose immense pressure on Hong Kong’s export performance in the remainder of the year,” the government spokesman said.
(Updates throughout with economist comments and context.)
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