Hong Kong Chief Executive Donald Tsang said in October that the territory faces a ‘huge’ deficit in the 2008/09 fiscal year

Year 2008 was clearly no ordinary 12 months for business and economics. Indeed, the major economic and business events of 2008 were so unusual and dramatic that they managed to push politics, war, sport, natural disasters and even annoying celebrities from the headlines. This was a doubly exceptional achievement considering the year included, among other things, an Olympic Games in China (a historic first) and a presidential election in the United States that saw a black American voted into the White House (another historic first).

The year produced a credit and banking crisis the experts said was the biggest threat to the global financial system in 80 years. It gave birth to the biggest credit crunch since the Great Depression. It resulted in the failure, forced acquisition, or partial nationalisation of some of the world’s biggest banks in both Europe and the US. And it was a year that saw an unprecedented boom in energy and other commodity prices (oil at US$147 a barrel in July; now around US$60) that just as quickly turned into a bust.

It was also a year in which interest rates, held steady or pushed higher by central banks almost everywhere in its opening months in response to the perceived threat of inflation were, in the second half, being slashed by amounts never before seen in a bid to stave off the perceived threat of a global recession. Governments around the globe, which had at least paid lip-service to the notion of budgetary spending restraint (the US being the most notable exception), suddenly turned on the fiscal taps to free up credit markets and get their economies moving again.

Along the way, some of the old rules (spoken and unspoken, written and unwritten) of international business, finance and economics were broken and some long-held beliefs shattered. This was especially the case in those bastions of capitalism, the US and its Wall St financial centre, where the words “government” and “intervention” used to be anathema. Now, as the new year of 2009 dawns there will be fervent hopes that a line will be drawn under the economic trauma of 2008. But – again, if the experts are to be believed – there seems likely to be little chance of avoiding a global downturn that could be lengthy.

It was truly an annus horribilis for homo economicus – an awful year for economic man.

Year 2008 in review
The worst of the 2008 credit crunch, banking crisis, financial crisis – call it what you will – is over, at least for now. The same cannot be said of the economic aftermath, which may be just beginning. That means 2009 is going to be a tough year for the Hong Kong economy. The best that can be hoped for is a mirror image of the 2008 outcome – that is, a 2009 that starts slowly in terms of growth and picks up as the year progresses. The likely magnitude of the slowdown and later pick-up is, however, in doubt as a result of the huge uncertainties that presently hang over the global economy.

This was reflected in the outcome of the Group of 20 (G20) nations meeting in Washington in November, which, apart from agreeing to pursue national policies to stimulate growth, decided to meet again in April 2009. The suspicion is they decided on this date because they hope by then the outlook for the year will be clearer. Yet another sign of the ongoing uncertainty is the rapid changes made in 2008 and 2009 growth prospects by various official forecasters (the IMF, OECD and so on) in the final months of the year.

But back to our key interest of Hong Kong. The accompanying table (see Table 1) shows Hong Kong’s recent performance and those of its major economic partners. It can be seen that by the second quarter of the year, some of the major economies of the world were feeling the pressure of the financial crisis. One exception was Mainland China, another the United States, where tax rebates as part of an early fiscal stimulus package had a positive impact. By the third quarter, however, the move to negative growth was clear.

It can be seen that Hong Kong also began the 2008 calendar year on a strong note, but the pace of growth slowed markedly in the following two quarters. Although fourth-quarter figures are not yet available, the revised annual growth forecast from the Hong Kong Government economist, Helen Chan, implies negative growth in the final three months of the year. This will be at least 0.9 percent, but could be more.  

While the Government believes the economy will be “rather subdued” in the period ahead, it has indicated there is some room for modest optimism. It says the unprecedented measures taken by various governments and central banks in the advanced economies (meaning bank liquidity support, interest rate cuts, forced bank mergers and partial nationalisation of some banks and other financial institutions, as well as fiscal and monetary stimulus packages); indicate that stability is gradually returning to the global financial markets. 

However, it believes that because credit markets remained unusually tight, it would take time to return to normality. This means the risk of a more prolonged and protracted global economic downturn had increased, with many advanced economies, including the US and European Union, already experiencing recession. The report added that the export-dependent economies in Asia would all be affected by different extents.

In such a difficult external environment, Hong Kong's export performance is likely to be lacklustre in the near term. Domestic demand will remain slow and the big fall in the stock market triggered by the global-wide stock market crash will continue to restrain consumers' propensity to spend. So, too, will the weakness in the property market. Businesses will also be more cautious in their investment decisions.

Outlook for 2009
Hong Kong’s economic growth performance in 2009 will be a mirror image of the 2008 experience. Growth in 2008 started on a high note and then dissipated as the credit crisis took hold and the global economy moved towards recession. In 2009, it will begin on a low note and finish with an improvement in the growth rate towards year’s end. Our own forecast is for real average growth in Gross Domestic Product (GDP) of 2 percent for the year, with consumer price inflation easing again to 3 percent.

While the slowdown in the world economy and international trade and investment will work against Hong Kong, the SAR does have some important positives acting in its favour. Externally, there is the prospect that weakness in the global economy will also be more obvious is the first half of the year, with a pick-up in the second six months. This is despite the fact that the major forecasters like the International Monetary Fund (IMF) are not, at least to date, prepared to predict good growth until 2010.

Externally, too, Hong Kong has the advantage of being closely linked to the Mainland. Beijing has already indicated it intends to keep the country’s economy moving whatever the difficulties. Growth has already slowed to below double digits – it was as low as 9 percent in the third quarter (see Table 1) – and may even get down to 7 or 8 percent in 2009 or 2010. But this is still strong growth and positive for Hong Kong.   

Mainland authorities have also lowered interest rates and improved liquidity in the banking system and the economy generally. In November last year, they also announced a 4 trillion yuan stimulus package over 2 years to ensure the economy keeps moving ahead. That’s equivalent to US$586 billion or 14 percent of China’s annual GDP. These stimuli will also help the Mainland economy to move along.

Since that announcement was made, doubts have emerged about the ability of the country to undertake such a huge spending programme in such a relatively short time-span and this “reality check” may moderate the impact of the proposed stimulus. Even so, China’s rate of growth in output is not expected to slow too much. Right now, the forecast is for 8 percent growth, down from the 10 percent plus of the past five years.

Also working in Hong Kong’s favour on the domestic front is the SAR Government’s expansionary budget announced earlier in 2008. The simple objective then was to hand back to the community what had become an embarrassingly large surplus, but it has turned out to be a tremendous cushion against the impact of the global slowdown that is now unfolding. The Government’s medium-term capital works or infrastructure programme is also working to mitigate the negative effects of the global crisis.

Finally, the conduct of Hong Kong’s monetary policy also gives reasons for confidence about the ability of the economy to ride out the storm. The linked exchange rate of the Hong Kong dollar to its US counterpart has resulted in lower interest rates locally as US rates have been cut dramatically. Furthermore, the Hong Kong Monetary Authority has moved confidently to ensure that liquidity in the banking and financial system has remained adequate to accommodate existing levels of economic activity.             

Despite these positives, there is general agreement the Hong Kong economy will experience slower economic growth in the year ahead, with the slowdown being more pronounced in the first half of the year than the second. The outlook beyond that depends on the view adopted about how the global economic downturn – and the financial crisis – will unfold in the year ahead and into 2010.

Global view
The dramatic nature of the deterioration in the global economic outlook, especially in the final months of 2008, is perhaps best reflected in the activities of the IMF, on which much of the world relies for information on the basic state of the international economy. In October 2008, the IMF issued its usual World Economic Outlook (WEO), in which it downgraded growth expectations for both 2008 and 2009.

Less than four weeks later, on November 6, it issued an update on that very same WEO, in which it again reduced growth rates for the global economy and most of its major national components such as the US, Europe, China, Japan and India. The update came with a call to governments to provide further macroeconomic stimulus to offset the rapidly weakening prospects for global growth.

But, as if to emphasise how rapidly events were moving, a week later, on November 13, the Organisation for Economic Co-operation (OECD) issued a preliminary report on the outlook with figures even more depressed than those produced by the IMF, at least for the old club of so-called “rich countries” that make up the OECD membership.

In its report, the organisation said that GDP for the OECD countries as a whole was expected to fall 0.3 percent year-on-year in 2009 before recovering slightly to grow by 1.5 percent in 2010. Economic activity in the US is expected to fall by 0.9 percent in 2009, by 0.5 percent in the Euro Zone and by 0.1 percent in Japan “as OECD countries enter a protracted slowdown”.

In the IMF’s update a week earlier, it said prospects for global growth had deteriorated in the month since its annual WEO was issued. It said financial sector deleveraging had continued and producer and consumer confidence had fallen. As a result, it lowered its forecast world growth in 2009 to 2.2 percent in 2009, down three quarters of a percentage point on its October estimate. This compares with 3.75 percent growth in 2008 and 5 percent in 2007.

More alarmingly, it said that in the advanced economies, output was forecast to contract on a full-year basis in 2009 (in line with the OECD forecast), and noted this would be the first such fall in the post-war period. It added that in the emerging economies, growth was projected to slow appreciably, but still reach five percent in 2009.

The light at the end of the tunnel, according to the IMF, is that its forecasts are “based on current policies”. It said global action to support financial markets and provide further fiscal stimulus and monetary easing might help to limit the decline in world growth. But it also warned that the banking and financial crisis might not be over and that declining commodity prices would have positive and negative effects depending on the position of individual countries as commodity exporters or importers.

It added that countries in East Asia – including China – generally had seen their growth rates cut by less than others because their financial situations were typically more robust, they have benefited from improved terms of trade from falling commodity prices, and they have already initiated a shift towards macroeconomic policy easing.

A final word
After the dramatic events of the past 12 to 18 months, especially in the US and Europe, there is a general consensus that the global economy is in for a period of slower growth, including a recession in the US, Japan and much of Europe. Where there is disagreement is how long and deep this period of slower growth is going to be. This makes forecasting difficult.

One side of the debate has it that this downturn will be much the same as others that have been dealt with in the recent past – that it will be relatively short and sharp and the world will be back to recovery mode and good growth in a short time. The alternate view, however, has it that the current downturn is different to anything that has been seen since the Great Depression of the 1930s and the recession will be long drawn out. Their view is that it is going to take a long time to correct the problems in the financial markets and the broader global economy.

Both sides of the debate can point to supporting evidence. Those who expect a relatively quick recovery point to the huge resources mobilised to combat the downturn: political and economic, fiscal and monetary, national and international. While this is true, it also says something about the apparent depth of the crisis the world is in. To have to mobilise such resources means that things are pretty bad. And this is the key element of the argument put forward by the opposing side in the debate. Their view is that things are so bad that it is simply going to take a long time for all the difficulties in the financial and economic systems to unwind and then be put back together in a healthy fashion again.

For this writer, the heart says there will be another relatively quick recovery, but the head – and a good look at the numbers – suggests this may not be the case. The over-riding worry, however, is that even if there is a quick recovery in response to the huge resources being thrown at the problem it may only be postponing the inevitability of yet another crisis until the excesses and imbalances in the global economy are properly addressed.  

Finally, it is worth noting that while East Asia – and Hong Kong and China – escaped relatively unscathed from the sub-prime crisis and banking sector credit crunch, they could not escape the broader economic downturn that followed. This means the so-called “decoupling” argument – the view that Asian economies had been separated from the fortunes of the West and rest of the world (which we strongly questioned in last year’s annual forecast) will definitely again have to be re-assessed.

*Ian K Perkin, business consultant and company director, can be contacted by email at perkin888@hotmail.com

Table 1: Sliding into global recession? (GDP growth % change)

 Notes: 1 Quarterly – per cent from previous period.
            2 Quarterly and Annual – per cent from a year earlier.
Sources: IMF, Hong Kong Government, Writer’s estimates

Table 2: Our estimates and outcomes (Hong Kong’s growth % change)

Table 3: Hong Kong historical outcomes and prospects 2009

Source: Hong Kong Government, writer’s estimates.

*Denotes Hong Kong Government forecast.
**Denotes Hong Kong Business Forecasts

IMF ILLUSTRATIONS
Sourced from November 2008 Update