Hong Kong's economy shrinks a record 8.9% during first quarter as coronavirus hits growth

The latest decline also marks the third straight quarterly economic contraction for Hong Kong – the longest since the 2009 crisis

The coronavirus outbreak mounted pressure on Hong Kong's economy, which was already weakened by political unrest. EPA

Hong Kong’s downturn is now the worst on record, extending the first recession witnessed in a decade as the coronavirus outbreak further hit an economy already weakened by political unrest.

The city’s economy contracted 8.9 per cent year on year in the first quarter, according to advance government data.

The decline surpasses the previous record of -8.3 per cent in the third quarter of 1998 and a 7.8 per cent contraction in the first quarter of 2009, the two worst quarterly readings in data dating back to 1974, according to the Census and Statistics Department Hong Kong.

It has been a very challenging year for SMEs in Hong Kong

The latest decline also marks the third straight quarterly contraction for Hong Kong, the longest such stretch since the aftermath of the global financial crisis in 2009.

Economists had forecast a drop in output of 6.5 per cent in the three months to March from the same period a year earlier.

Hong Kong’s economy shrank 1.2 per cent last year, the first time that had happened since 2009.

On Sunday, Financial Secretary Paul Chan pointed to the worst full-year performance on record, with a contraction of as much as 7 per cent. Mr Chan will speak to the media at 5pm local time on Monday about the gross domestic product data.

Even as the city prepares to ease some social distancing measures amid a steady improvement in the local outbreak situation, the hit to global commerce and the threat of renewed anti-government unrest means activity will probably remain depressed.

Unemployment is increasing amid the devastation in tourism, retail, transport and other industries.

"Faced with a collapse in global demand, Hong Kong's small, open economy is taking a severe hit," said Qian Wan, economist with Bloomberg Intelligence, in an April 28 note before of the results.

“The trade- and service-oriented economy will suffer a major drag from the global downturn.”

Mr Chan, the city’s top economic policy official, had signalled that the reading for the first quarter this year could be even worse than past lows.

The city’s economy already contracted in the second half of last year amid street protests and a government crackdown.

The effects of the extended downturn can be especially seen across the city's struggling small and medium-sized businesses, which have borne the brunt of the impact from protests since last year and now the coronavirus.

“Hong Kong has been a risk-taking society relative to starting a business, but the situation going on the last year will create long memories in people’s minds,” said Todd Handcock, chairman of the Canadian Chamber of Commerce.

"It has been a very challenging year for SMEs in Hong Kong. The unfortunate reality is some of these will not survive and others will struggle for a very long time."

As of December, 340,000 SMEs accounted for more than 98 per cent of all business units and employed some 1.3 million people or about 45 per cent of the total excluding civil service, according to government data.

Sentiment among small businesses is sitting near a record low while those reporting a need for credit have jumped to an almost four-year high of 8.8 per cent, March government data shows.

Faced with a collapse in global demand, Hong Kong's small, open economy is taking a severe hit

"If we all fold, the unemployment levels are going to skyrocket in this city," said Bella Dobie, co-founder and managing director of Hong Kong branding and marketing company Orijen.

The company has six full-time employees including Ms Dobie and has been in business since 2000.

“The economy of Hong Kong has been struggling since the start of the protests and Covid-19 is just a double whammy.”

The government has taken steps to address the looming employment crisis through several rounds of stimulus spending, most prominently through an HK$80 billion (Dh37.9bn) wage subsidy programme that is not expected to begin distribution until June.

Those businesses that do survive will likely emerge with smaller, leaner operations, with lasting implications on the wider economy as jobs that once existed may not return.

Total employment in the city shrank by a record 3.6 per cent in March.

As of December, the number of job vacancies in the private sector of Hong Kong was about 54,000, down 30 per cent from a year ago, according to government data.

Vacancies in retail and accommodation and food services fell 44 per cent and 65 per cent, respectively.

The looming threat of returning protests once the virus fades and measures forbidding group gatherings ease could also further extend the pain for businesses and the economy.

“The Covid-19 impact could be longer lasting than expected globally and the local civil unrest could intensify again, both of which will impose major downside risks to Hong Kong’s economic growth,” said Tommy Wu, senior economist with Oxford Economics in Hong Kong.

"The economy will continue to be battered by rising unemployment and business closures in the second quarter onwards," he said.