The global economy and Hong Kong – a positive future?

Hong Kong’s strong export trading links with China, the US, the EU and Japan not only places the country at the heart of the global economy, but also, inevitably, renders it susceptible to the changes in fortune of its key export markets.

The robust recovery since the global crisis, which has been echoed by other strong Asian markets, such as India and of course, China, have demonstrated that even under extreme external pressures, the Hong Kong economy has an almost inbuilt resilience.

Nevertheless, recent reports about the Hong Kong economy’s 0.5% contraction of GDP during Q2 not only underlines the influence of other key markets, but has already triggered speculation from some commentators that a recession might be imminent.

This view, however, is regarded as ‘overblown’ by some key economists due to the strong domestic demand. Yet it is also recognised that business and consumer confidence in the US and Europe is likely to hinder Hong Kong’s growth, although this could also have a calming effect on the growing inflation figure which reached 7.9% in July 2011.

So what exactly is the state of the global economy and what factors are likely to impact on Hong Kong? In broad terms, the economic developments that have taken place over the past seven months have been largely on track with previous expectations of a continued recovery in global activity. Global economic growth reached 4.0% in 2010, while business activity improved and international trade volumes returned to pre-crisis levels.

Countries in Asia and Latin America have led the expansion and have continued the process that started more than 10 years ago, where emerging markets have been the driving force behind the global economy. However, the more established and advanced economies have continued to display much more muted rates of economic growth, giving rise to a ‘twospeed’ pattern of economic growth, with advanced markets lagging behind key emerging markets.

The policies adopted by emerging and advanced markets during the credit crisis have also shaped the current fortunes of these two groups. While advanced economies are characterised by high sovereign debt, low interest rates and real term depreciating currencies, for emerging countries, the situation is precisely the opposite with lower debt levels, higher interest rates and appreciating currencies.

Looking forward, this two-speed economic recovery is expected to continue and even though the pace of global growth is forecast to slow to 3.1% in 2011, the recovery in the global economy should gain a firmer footing in 2012.

However, this projection is not uniform across all countries or balanced in terms of risk. While some emerging markets begin to show signs of overheating, other factors, such as high unemployment and declining confidence in advanced economies create an additional obstacle to their protracted recovery processes.

In addition to the most recent spell of financial turmoil since July, where market volatility has increased sharply, the first half of 2011 was also characterised by a series of large-scale events that have significantly increased the uncertainty surrounding the future growth.

Aside from the upheaval in the Middle East & North Africa (MENA) and the devastating earthquake in Japan, the European sovereign debt crisis has intensified further and pressures are mounting on policy makers to find a credible solution.

A failure to do so could potentially have large-scale consequences for economic performance in the Eurozone, with global repercussions, which also presents the risk of slowing down growth across emerging markets.

In the US, the impact of its massive debt followed by the country’s downgrading by S&P and the apparent indecisiveness of the Whitehouse, have already rippled across world financial markets, giving an indication of what can happen when negative influences coincide or accumulate.

While the global economic situation will have an influence on Hong Kong, like any country, it can also influence its own future. For example, government revenues are still dependent on income from land sales and investment of accumulated surpluses, which makes it vulnerable to economic cycles.

This situation has already prompted former secretary for commerce and economic development, Frederick Ma, to suggest recently that Hong Kong should pursue a more diversified economy with a focus on value-added industries and new technologies with less reliance on finance and real estate.

Whatever the future holds for Hong Kong, it is clear that the global economic environment has a significant influence on every aspect of its prosperity, so in some respects, it’s comforting to know that the main scenario for economic performance in the year ahead is still cautiously positive. However, this assumes that the imbalances that exist in advanced and emerging markets can be addressed by way of successful implementation of policy measures.

In order to find out more about the global economic outlook, a detailed report is available for download from our website.