A stuttering recovery in 2021…
The Covid-19 shock in early 2020 hit an economy that was already in recession. After several quarters of contraction, private consumption, investment, tourism and goods exports all collapsed in H1 2020. Activity – with the exception of tourism – then recovered rapidly, supported by a large fiscal stimulus package, an easing of monetary conditions and the strong acceleration of foreign trade. However, the recovery has remained unbalanced and has rapidly lost steam, before being interrupted in Q1 2022.
While foreign trade recovered strongly after the shock in Q1 2020, boosted by the very solid performance of Chinese exports, domestic demand lagged behind despite the very accommodative policy mix. The investment ratio, which fell from 21.6% of GDP in 2018 to 17% in 2020, barely improved in 2021 (reaching 17.5%), held back by the territory’s loss of attractiveness and worsening economic prospects.
Private consumption (65.2% of GDP in 2021, down from 68.4% in 2018) faced significant constraints, notably including border closures (purchases by non-residents, primarily from China, represented nearly half of retail sales before the health crisis), a degraded labour market and low consumer confidence.
The labour market has not regained its position from before the crises of 2019 and 2020, with the hardest-hit service sectors also being the most labour-intensive, such as restaurants and hotels. Between Q4 2018 and Q4 2021, real wages grew by less than 1% and total employment fell by 4.8%. The total population and the active population also fell over the same period, by 1.1% and 3.8% respectively. The unemployment rate climbed from 2.7% in December 2018 to a peak of 6.8% in February 2021, then fell back to 3.5% in January 2022 before starting to rise again (to 4.2% in February).
... Interrupted by Omicron in Q1 2022
Up until the end of 2021, Hong Kong was successful in controlling the Covid-19 pandemic, albeit at the cost of significant restrictions (notably at the border). However, the health situation has deteriorated rapidly since the arrival of the Omicron variant in late December 2021. The number of infections soared out of control, especially due to insufficient vaccination rates. By 6 April 2022, 86% of the population had received two vaccine shots, from just 65% at end-2021; and the vaccination rate was only 61% for those aged between 70 and 79 and just 35% for the over-80s. The number of new cases jumped from less than 100 in the last week of December to 450,000 in the first week of March (in a population of 7.4 million), and the mortality rate also rocketed[1].
Between January and mid-March, the authorities introduced very stringent restrictive measures in Hong Kong. Mobility indicators, which had returned to pre-crisis levels by the end of 2021, collapsed and in early March were running at their lowest levels since the pandemic began. Retail sales fell sharply once again. Since mid-March, this wave of the epidemic appears to have eased and mobility conditions have started to improve. They are likely to see a very gradual return to normal over the next few months given the tough Covid-19 strategy.
International conditions have worsened
Hong Kong is now also facing other challenges, linked to the deterioration of international conditions. First of all, Hong Kong will suffer the indirect repercussions of the war in Ukraine through its effects on global trade and on commodity prices. Its direct trade with Russia and Ukraine is very limited, at 0.2% and 0.7% respectively of total imports and exports. However, because of its role as a regional trade hub, Hong Kong is vulnerable to the expected slowdown in world trade and disruptions to supply chains. These disruptions are expected to be exacerbated over the next few weeks by the consequences of the pandemic wave on industrial production and transport of goods in China. Therefore, in the short term, a slowdown in exports (of which 98% are re-exports) will add to Hong Kong’s weak domestic demand.
