Hong Kong’s economic recovery after the COVID-19 pandemic was short-lived and softer than expected, with private consumption growing but imports and exports remaining weak. Capital investment and tourism have also been lacking, with visitor arrivals only 65% of their 2018 level.
Hong Kong’s asset markets are also in difficult positions, with residential property prices declining by about 5%. The Hang Seng Index dropped over 15% in 2023, and Hong Kong stocks hit a four-year low in the first half of 2023. Funds raised from initial public offerings cratered to a 20-year low, raising concerns that Hong Kong has lost its luster as an international financial center. The government cut its latest annual GDP forecast from over 4.5% to only 3.2%.
Hong Kong’s disappointing post-pandemic economic performance was due to both cyclical and structural factors. On the cyclical side, rising local interest rates following US Federal Reserve rate hikes made residential properties unattractive investments.
The strong local currency makes Hong Kong expensive for tourists, while local residents prefer shopping across the border. On the structural side, geopolitical tensions between the US and China have led to trade sanctions and technology controls, reducing trade shares and rerouting goods around Hong Kong through third countries like Vietnam and Mexico.
Geopolitical tension in Hong Kong may pose a threat to the city’s economy, as it has long been a gateway to mainland China, fueled by financial services, trading, logistics, tourism, and professional services.
The city’s economy is closely integrated with the region, leading to a significant wage and price disparity between Hong Kong and neighboring Shenzhen. Despite governmental efforts to revitalize local businesses, Hong Kong residents will continue to take advantage of cheaper services and goods nearby. Demographics also pose a challenge, with the elderly population increasing and new births becoming rare.
The fertility rate dropped to 0.77 in 2021, among the lowest recorded rates in the world. This trend has been accelerated by the outward migration of Hong Kong’s younger population to foreign countries like the United Kingdom and Canada. The heavy-handed treatment of protestors and the enactment of national security laws in 2020 have persuaded some Hong Kong families to leave. Emigration has also shrunk Hong Kong’s labour force, with 74% of participating companies facing talent shortage issues and increasing labour costs.
Hong Kong’s government is importing human resources from mainland China to address talent drain and an aging population. The government has launched talent schemes, granting easy visas to educated individuals, which has approved over 100,000 applications.
However, the city’s structural challenges suggest that the economy will continue to struggle and the government may suffer from a structural deficit in the medium term. With falling property prices and low transaction volumes, the government is set to run a large deficit this year. As the population ages, healthcare and social welfare expenditures are expected to increase.
Chief Executive John Lee has proposed pushing ahead with two infrastructure megaprojects, the Northern Metropolis and the Kau Yi Chau Artificial Islands, despite economic and political uncertainties and high financing costs.
