New virus outbreak in Hong Kong dims city’s economic outlook, prompting analysts to cut forecasts

Several economists have downgraded their economic forecasts for Hong Kong as the semi-autonomous Chinese territory experiences a surge in coronavirus cases.

The uptick in numbers forced authorities to impose stricter social-distancing measures this week.

Hong Kong said Wednesday that advance estimates showed its economy shrank by 9% in the second quarter compared to a year ago. That’s the city’s fourth consecutive quarter of year-on-year contraction, according to official data.

The government said in a statement that the pandemic remains “a key threat” to the global economy and a renewed outbreak locally “clouded the near-term outlook for domestic economic activity.”

“Nonetheless, once the local epidemic is contained again and external environment continues to improve, the Hong Kong economy hopefully will gradually recover in the rest of the year,” it added.

Economists agreed that stricter social-distancing measures imposed after a recent flare up in cases will dampen any economic momentum. But some don’t share the government’s view that a recovery could come this year.  

Economists at consultancy Capital Economics forecast an 8% contraction in the Hong Kong economy this year — close to doubling their previous projection of a 4.5% contraction.

Capital Economics’ latest downward revision is also worse than the government’s official forecast for a 4% to 7% contraction in 2020.

“Until a few weeks ago, Hong Kong’s economy looked set to start recovering this quarter,” the economists said in a Wednesday note, pointing to the government’s cash handouts of 10,000 Hong Kong dollars ($1,290) that looked set to help lift economic activity after being disbursed earlier this month. 

But the stricter containment measures could “postpone the recovery in consumption, and put additional pressure on employment and incomes, dampening the boost from the government cash handouts,” they added.

In addition to Capital Economics, Citi also downgraded its forecast for Hong Kong and predicted a full-year economic contraction of 6.3% compared to 5.5% previously.

Iris Pang, chief economist for Greater China at Dutch bank ING, expects the new social-distancing measures to stay in place for some time as the previous relaxation of restrictions might have contributed to the latest jump in cases.

Pang said in a note on Wednesday that she’s expecting the Hong Kong economy to shrink by 10% in the third quarter and 5% in the fourth quarter — bringing the full-year contraction to 8.3%.

“Covid-19 cases have increased in Hong Kong, and there could be many sources that are hard to trace,” she said. “The government has tightened further social distancing measures again since the outbreak, which the health department claimed could be due to the previous relaxation of social distancing measures.”

Hong Kong’s leader Carrie Lam warned this week that the renewed outbreak could overwhelm the city’s health-care facilities and cost lives. New measures imposed in the city include a ban on gathering of more than two people and restrictions on dine-in services.

But some economists said Hong Kong’s weak economic performance last year could help the city post better gross domestic product numbers in the second half of this year.

The economy contracted in the third and fourth quarters of last year, weighed down by the U.S.-China trade war and widespread pro-democracy protests.

Gary Ng, an economist at French investment bank Natixis, told CNBC’s “Squawk Box Asia” on Thursday that the economy could “pick up” from the second quarter to register a contraction of 5% to 6% in the second half of 2020. That would bring the full-year contraction to around 7%, he added.

“In the second half of the year, I do expect that more fiscal measures targeting industries — especially retail, catering, accommodation as well as construction — need to be implemented,” he said, explaining that those sectors are a “key driver of the current escalated unemployment rate.”