Hong Kong virus outbreak dampens economic outlook, analysts cut forecasts

Several economists have lowered their economic forecasts for Hong Kong as the semi-autonomous Chinese territory experiences an increase in coronavirus cases.

The increase in the number forced the authorities to impose stricter measures of social distancing this week.

Hong Kong said on Wednesday that advance estimates showed that its economy contracted 9% in the second quarter compared to the previous year. That’s the fourth year-over-year contraction in the city’s fourth consecutive quarter, according to official data.

The government said in a statement that the pandemic remains “a key threat” to the global economy and that a locally renewed outbreak “clouded the short-term outlook for domestic economic activity.”

“However, once the local epidemic is contained again and the external environment continues to improve, the Hong Kong economy will gradually recover in the rest of the year,” he added.

Economists agreed that the stricter social distancing measures imposed after a recent outbreak in the cases will dampen any economic momentum. But some do not share the government’s view that a recovery could occur this year.

Economists at consulting firm Capital Economics forecast an 8% contraction in the Hong Kong economy this year, nearly doubling its previous forecast of a 4.5% contraction.

Capital Economics’ latest downward revision is also worse than the government’s official forecast for a contraction of 4% to 7% in 2020.

“Until a few weeks ago, the Hong Kong economy seemed poised to start to recover this quarter,” economists said in a note on Wednesday, pointing to Hong Kong dollar ($ 1,290) government cash funds that looked ready. to help boost economic activity after being disbursed earlier this month.

But stricter containment measures could “postpone the recovery in consumption and put additional pressure on employment and income, dampening the momentum of government cash donations,” they added.

In addition to Capital Economics, Citi also lowered its forecast for Hong Kong and predicted a year-on-year economic contraction of 6.3% compared to 5.5% previously.

Iris Pang, chief economist for Greater China at the Dutch bank ING, hopes that the new social distancing measures will remain in place for some time, as the earlier relaxation of the restrictions may have contributed to the latest jump in the cases.

Pang said in a note on Wednesday that it expects Hong Kong’s economy to shrink 10% in the third quarter and 5% in the fourth quarter, bringing the year-round contraction to 8.3%.

“Covid-19 cases have increased in Hong Kong, and there could be many sources that are difficult to trace,” he said. “The government has tightened social distancing measures again since the outbreak, which the health department says could be due to the earlier relaxation of social distancing measures.”

Hong Kong leader Carrie Lam warned this week that the renewed outbreak could overwhelm the city’s healthcare facilities and cost lives. New measures imposed in the city include a ban on gathering more than two people and restrictions on dining services.

But some economists said Hong Kong’s weak economic performance last year could help the city post better gross domestic product numbers in the second half of this year.

The economy contracted in the third and fourth quarters of last year, burdened by the trade war between the United States and China and widespread protests in favor of democracy.

Gary Ng, an economist at French investment bank Natixis, told CNBC’s “Squawk Box Asia” on Thursday that the economy could “recover” from the second quarter to record a 5% to 6% contraction in the second half of 2020 That would add the year-round contraction to about 7%, he added.

“In the second half of the year, I hope that more fiscal measures targeting industries, especially retail, catering, lodging and construction, will be implemented,” he said, explaining that those sectors are a “key driver of the current escalating unemployment rate.”