HONG KONG

Hong Kong has displayed solid growth rates in the past decades, with +4.2% on average in the 2000s and +2.9% on average in the 2010s. However, going into the pandemic, the economy was already in recession due to social unrest. Thus, GDP contracted for two consecutive years, by -1.6% in 2019 and -6.1% in 2020. Despite a good recovery in 2021 (at +6.4%), the economy will probably only return to its 2018 output level in 2023. Tailwinds come from the external sector, supported by continued strong global demand. Domestically, the pace of vaccination has been relatively slow compared to peers, and the continuation of a zero-Covid policy creates pressure on household and business confidence, delaying the full recovery of domestic demand. Ultimately, the possible easing of sanitary restrictions in 2023 could support the recovery of household spending, the retail sector and business investment. Tourism should remain constrained by stringent cross-border conditions for most of 2022.

Fiscal support was stepped up in an unprecedented way during the crisis, with measures such as the distribution of consumption vouchers, an employment-support scheme and other relief measures for households and enterprises announced in 2020 and 2021. A fresh package of pandemic support measures were announced in February 2022, which is likely to keep the fiscal balance in deficit. However, ample fiscal reserves mean that financing it will not be a threat to Hong Kong’s fiscal sustainability.

As far as monetary policy is concerned, the room to maneuver is limited as the HKD is pegged to the USD. As a result, the Hong Kong Monetary Authority (HKMA) closely follows the decisions of the US Federal Reserve. The latter cut its policy rate by 150bp in early 2020 and hikes are expected in 2022.

Hong Kong is very well positioned in the 2020 World Bank Doing Business survey. In 3rd place, it excels in areas such as dealing with construction permits (ranking first), paying taxes (second), getting electricity (third) and starting a business (fifth). However, it does lag behind in areas such as registering property (ranking 51st), resolving insolvency (45th), getting credit (37th), enforcing contracts (31st) and trading across borders (29th).

Political stability is likely in the short to medium run in Hong Kong. A return of the level of protests seen in 2019 is unlikely due to the national security law implemented in July 2020. This is despite strong popular discontent against the government and the measures and reforms it has undertaken (e.g. new electoral system adopted in March 2021), as illustrated among other things by a record-low turnover in the election of the Legislative Council in December 2021. A new chief executive is likely to succeed Carrie Lam in May 2022, with limited impact on local policy direction, given the increased influence of the mainland’s central government.