The spread of coronavirus (2019-nCov) has significantly accelerated in recent weeks and fears have been rising quickly in Hong Kong, a city hit severely by SARS in 2003. In this report, we assess the impact of virus outbreak on the outlook of Hong Kong economy:
- First annual recession in a decade. Weighed down by US-China trade war and social events, 2019 HK economy slipped into its first recession in a decade. The coronavirus outbreak, the slowdown of mainland China’s growth and the weakness of global economic recovery are all among the major drags on economic rebound of HK. We believe that the business confidence and economic activity will remain rather weak this year.
- Coronavirus outbreak adds insult to injury. HK now has more experience to manage public health crisis than 2003. However, SARS did not bring a supply shock to HK while 2019-nCov is likely to affect the supply side. In addition, due to weaker growth momentum before the virus and weaker global supply chain, HK economy may need more time to recover this time than it did in 2003. We expect 2020 GDP to shrink by 2%, 0.8% and 7% in the base case, best case and the worst scenario respectively.
- Vulnerable sectors: private consumption, tourism-related and re-exports. Due to social environment and virus spread, we now expect retail sales to further drop 5% and visitor arrivals to HK this year to drop 6% in 2020 in the base case. Tourism-related industries may have another challenging year and some companies may suffer more than they did in 2003 during SARS. The shock by 2019-nCov will be greater than SARS to the city’s foreign trade, leading to a contraction of 2.5% in 2020.
- Impact on foreign exchange and money markets. Tight liquidity and risk-on sentiments together have contributed to the appreciation of HK dollar exchange rate since Nov 2019. Looking ahead, we believe the currency’s strength will be short lived, and the carry trade’s attractiveness and seasonal demand will fade. We expect HK dollar to weaken to around 7.80 as the city’s dimmed economic outlook will weigh on its currency.
- Impact on job market and inflation. Combined effects of drop in domestic consumption and decrease in tourist spending will worsen the labor market during the virus outbreak. Overall unemployment rate is expected to rise to around 5% and some severely affected sectors will lay off workers due to the lower demand. Headline CPI is likely to hold largely steadily around 3%.
- Policy response: more fiscal stimulus. HK's fiscal reserves still account for some 40% of its GDP at present, reflecting the city's solid economic buffers. However, fiscal stimulus packages wouldn’t go far enough to improve the growth momentum amid multiple headwinds.
