Hong Kong in Recession as Quarterly GDP Falls

Hong Kong slipped into recession in the third quarter as exports were hit by weakening global demand and consumption was hurt by a drop in asset prices and concern about the economic outlook.

Third-quarter gross domestic product (GDP) shrank 0.5 percent, seasonally adjusted, from the previous quarter.

Compared with a year earlier, GDP grew 1.7 percent, well below an expected 2.6 percent increase, and the government slashed its full-year growth forecast to between 3 and 3.5 percent from a range of 4 percent to 5 percent.

The economy's performance in July-September was the weakest since the SARS outbreak hammered consumer and business confidence in the spring of 2003 and highlights Asia's vulnerability to a global economic downturn.

"As expected, Hong Kong is in a technical recession and this may last until early next year. The economic outlook is not that good," said Daniel Chan, senior investment strategist at DBS Bank.

"China may help, but Hong Kong's overall exports will continue to slow down because our major trading partners, such as Europe and the U.S., are also in a recession," he said.

Singapore is already in recession -- defined as two consecutive quarters of negative quarterly growth -- and Japan is edging close to recession.

Japan reports third-quarter economic growth figures on Monday.

The rest of the region should continue to expand but Citigroup forecasts growth in emerging Asia to ease to 7.2 percent next year from an estimated 8.9 percent this year.

Hong Kong, as a small, open export-oriented economy like Singapore is feeling the impact of weakening U.S. and European demand for Asian goods.

The value of exports in the third quarter fell 1.3 percent from the previous quarter and analysts say a downturn for the trade sector will deepen as advanced economies continue to weaken next year.

The International Monetary Fund forecasts 2 percent growth for Hong Kong in 2009, but a number of local economists say it will be hard-pressed to achieve 1 percent growth.

Expected job losses in the trade, retail and property sectors in particular will push the unemployment rate up from 3.4 percent at present, curbing wage growth and deterring consumption, analysts say.

Private consumption expenditure, which excludes spending by tourists, rose only 0.3 percent in the third quarter from the previous quarter, as locals were hit by a 50 percent plunge in the stock market this year and as property prices have started to decline.

Investment spending rose 3 percent from a year earlier while net services exports still managed solid growth of 5.3 percent.

Consumption had been buoyant.

It was the main driver of economic growth, which averaged 7.3 percent annually in the past four years, as the territory benefited from China's booming economy.

China will still provide some cushion for Hong Kong as mainland companies require financial services in the city and mainland Chinese are still flocking in to shop here.

However, China's economy is also slowing, clouding the outlook for Hong Kong where economists expect the economy to deteriorate further in the fourth quarter.

Copyright 2008 Reuters. Click for restrictions.