Hong Kong’s “specialness” eroding, trend growth to 2030 tipped at 1.1%

July 20, 2020

SINGAPORE - The blend providing Hong Kong's comparative advantage, making it unique in the global economy and financial system, cannot be replicated -- and has propelled its economy for decades. Now, however, these advantages are at risk of erosion, says Standard and Poor's in a report released today.

"Rising policy uncertainty, fraying social cohesion, and greater competition from mainland China are making Hong Kong less special, and trend growth will more than halve through 2030 to about 1.1%," the report says.

The growth slowdown will add to unavoidable downward pressures resulting from its place as one of the most rapidly-aging societies in Asia, the report adds.

"In the near term, we expect a cyclical recovery with growth of -4.7% in 2020, followed by a rebound of 4.9% in 2021," it says. "However, we expect the underlying trend growth rate to slow."

Shaun Roache, S&P Global Ratings Asia-Pacific chief economist, said: "The balance of risks to Hong Kong's long-term economic prospects is tilted to the downside.

"Prominent among them is a further rapid deterioration in the U.S.-China relationship, resulting in a decoupling of the U.S. dollar and Chinese renminbi financial systems.

"A second risk is an accelerated financial opening of the mainland that would lessen Hong Kong's role as a conduit."

Roache said: "A plausible downside scenario could see trend growth of zero in a decade.

"The main upside risk is that Hong Kong benefits from a slower pace of mainland opening, and attracts an increasing share of China's offshore financing business."

Unique comparative advantages had allowed Hong Kong's economy to grow much faster than one might expect, Roache said.

"More jobs have helped but the real driver of growth has been labour productivity.

"From the 1997 handover to China, to 2018, before social unrest intensified, Hong Kong's real GDP grew by almost 3% a year -- of which labour productivity and employment have contributed 2.1% and 0.8%, respectively.

"This is really a tale of two sectors, financial services and import-export trade. The prospects for both will depend on the extent to which firms that invest in Hong Kong perceive that it retains its comparative advantages."

Roache says tehat, for Hong Kong, three types of uncertainty are rising.

"First, perceptions of Hong Kong's relationship with the mainland appear to be changing.

"Second, how the new relationship, based on what has been released publicly to date, will work in practice is also unknown.

"Third, how governments in other parts of the world will treat Hong Kong as a result of these changes has been thrown into doubt (the removal of Hong Kong's special status by the U.S. Government may not be the last word).

"Hong Kong is aging quicker than almost any other economy in Asia-Pacific.

"The working age population --which we define as individuals aged between 15 and 65 years -- grew by about 1% a year through the decade ending 2010.

"In part, this was helped by migration inflows. However, this population started shrinking in 2015.

"A plausible downside for the economy would be a steady but persistent rise in perceptions of domestic policy uncertainty.

"Perceptions of uncertainty may be broad-based, and would encompass more than macro-economic and financial policies, including Hong Kong's soft infrastructure.

"We assume Hong Kong's trend growth will fall all through the next decade and reach 1.1% by 2030, more than halving from the estimated 2.7% in 2018.

"Incorporating a post-COVID cyclical recovery, this would mean the cumulative, annualised growth rate for the decade through 2030 would be 2%, down from a 10-year growth rate of about 3.5% in 2015.

"We arrive at this figure by making assumptions about employment and labour productivity which, in turn, reflect how quickly we think Hong Kong's specialness erodes over time."

www.stdandardandpoors.com (ATI).