Impacts of the Financial Tsunami

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Impacts of the Financial Tsunami on the Hong
Kong Economy Government Economist 3 November
2008
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Economy already slowing before global financial
crisis
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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

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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

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Impact on trade
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Exports slackening fast as global downturn
increasingly set in
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Hong Kongs total exports of goods by
market(year-on-year rate of change in real terms)
2007 2008 Q1 2008 Q2 2008 Q3
US -2.5 -5.8 -7.4 -6.9
EU 3.8 4.6 1.6 2.3
Asia excl. Japan and Mainland China 10.4 19.0 10.7 2.4
Mainland China 12.9 12.2 8.6 3.9
Japan -0.8 -3.2 -4.1 -1.3
Overall 8.3 9.1 5.4 2.2
Note () Crude estimates.
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World GDP growth in current and previous downturns
1998 AFC 2001 global downturn 2009 global downturn
World GDP 2.5 2.2 3.0
Of which
US 4.2 0.8 0.1
EU 2.9 2.0 0.6
Japan -2.0 0.2 0.5
Mainland 7.8 8.3 9.3
Singapore -1.4 -2.4 3.5
South Korea -6.9 3.8 3.5
Thailand -10.5 2.2 4.5
Taiwan 4.5 -2.2 2.5
Indonesia -13.1 3.6 5.5
Note () IMFs Forecast in the World Economic
Outlook.
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Current US strength will not bode well for HKs
exports
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Guangdongs export growth slower than the
national total
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Impact on asset markets and domestic demand
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Stock market saw a significant correction
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Property market also down across the board
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Property market transactions down to level close
to 2003 average
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Asset price corrections in the current and
previous downturns
1998 2001 2008 so far
Hang Seng Index(trough/peak) -60.17 Aug 97 16 673 13 Aug 98 6 660 -51.2 28 Mar 00 18 302 21 Sep 01 8 934 -65.2 30 Oct 07 31 638 27 Oct 08 11 016
Residential flat prices -32.5 Dec 98/Dec 97 -9.8 Dec 01/Dec 00 2.3 Sep 08/Dec 07
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Negative wealth effect can be profound
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Slowdown in income will also impact on consumption
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Impact on Businesses
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Bankruptcy cases still low,but likely to rise
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Business confidence worsened markedly(Results of
latest Quarterly Business Tendency Survey)
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Results of latest Business Tendency Survey(Large
firms)
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Impact on SMEs also severeFigures on SMEs
(As in June 2008) No. of SMEs Employment (000)
I/E trade 91364 418
Wholesale retail trades, restaurants and hotels 64349 293
Financing, insurance, real estate business services 54896 209
Community, social personal services 31097 139
Transport, storage communications 9112 57
Manufacturing and others 14873 102
Total 265690 (about 98 of all business units) 1219 (about 1/3 of total employment)
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Business investment set to slow
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Impact on labour market
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Employment conditions to worsen as economy slows
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Unemployment expected to rise further
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Employment impacts in previous downturns
1998AFC 2001 global downturn 2003 SARS
GDP growth in the economys trough -8.1 (98 Q3) -1.7 (01 Q4) -0.9 (03 Q2)
Employment (year-on-year change) -3.3 (98 Q4) -2.1 (02 Q2) -1.8 (03 Q3)
Unemployment rate 5.9 (98 Q4) 7.5 (01 Q2) 8.5 (03 Q2)
Swing in underlying CPI inflation from preceding year -2.7 (1998 over 1997) -0.8 (2002 over 2001) -1.1 (2003 over 2002)
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Sectors expected to be harder hit(1)

• Financial services
• Trading and logistics
• Tourism and consumption-related
• Real estate and construction

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Sectors expected to be harder hit(2)
Direct contribution to GDP in 2006 () Employment in 2007 (000) Share in total employment ()
Financial services 15.9 193 5.5
Trading and logistics Trading Logistics 27.4 22.4 5.0 844 634 210 24.2 18.2 6.0
Tourism consumption- related sectors (Retail restaurants hotels) 5.5 549 15.7
Real estate construction 7.1 386 11.1

() 2006 position.
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Wide range of uncertainties ahead
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HKs 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

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Factors that may cushion HK against a severe
slowdown

• Global concerted efforts to prevent systemic
  crisis from spreading further
• Global financial markets stabilise
• CPGs support for Hong Kong Premier Wens 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

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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

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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

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END