Impacts of the Financial Tsunami on the Hong Kong Economy Government Economist 3 November 2008
Global financial crisis adding significant downside risks to HK economy • Global financial crisis mutated into synchronised downturn • Financial markets under exceptional stress credit conditions unusually tight • Key risk facing advanced economies is downward spiral between asset prices and real economy, leading to prolonged slump • Increasing impact on Asia in coming quarters
Transmission mechanisms – how it impacts on HK • Trade • Asset markets • Credit market tightness impacting on SMEs • Consumption and investment • Unemployment, with feedback on domestic sector
Hong Kong’s total exports of goods by market(year-on-year rate of change in real terms) Note : (*) Crude estimates.
World GDP growth in current and previous downturns Note: (#) IMF’s Forecast in the World Economic Outlook.
Business confidence worsened markedly(Results of latest Quarterly Business Tendency Survey)
Sectors expected to be harder hit(1) • Financial services • Trading and logistics • Tourism and consumption-related • Real estate and construction
Sectors expected to be harder hit(2) (*) 2006 position.
HK’s economic slowdown will be more severe if: • Global financial market meltdown • Global downturn degenerated into prolonged and severe slump; and Asia moving into recession • US$ continues to strengthen • China's exports slow markedly • Property market suffers continued fall-off
Factors that may cushion HK against a severe slowdown : • Global concerted efforts to prevent systemic crisis from spreading further • Global financial markets stabilise • CPG’s support for Hong Kong: Premier Wen’s recent remarks • China maintains reasonably strong momentum, especially in trade • Interest rates hold stable or move down • US$ to reverse trend • Infrastructure projects can speed up
Short-term economic outlook • GDP growth likely to slow down further in Q4; earlier forecast of 4-5% for 2008 difficult to attain • Economic conditions will worsen further in early 2009; prospect of turnaround in H2 2009 still highly uncertain • Unemployment rate looks set to rise further, more visibly in 2009 • Inflation likely to ease as pressures from local and external sources recede significantly
Overall • Global financial crisis will inflict major shocks on HK economy via various channels • HK's strong fundamentals mean speedy recovery once global situation turns for better • But short term outlook inevitably much dimmer; risk of recession in 2009 now higher • Remain alert to risk of potentially more damaging impact from global crisis • Need to get prepared for difficult period ahead