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Hong Kong’s first recession in a decade could be even worse than feared

Months of protests in Hong Kong that forced shops to close, paralyzed public transportation and scared off tourists have left the city’s economy in worse shape than feared.

Hong Kong plunged into recession in the third quarter, according to official data released Thursday. The economy shrank 3.2% during the three months to September, compared to the previous quarter. That’s a sharp slowdown from the 0.5% contraction recorded in the second quarter, and much worse than economists had expected.

With no immediate resolution to the city’s political crisis on the cards, Hong Kong’s first recession in a decade could extend into the new year. Compared to the previous year, the economy shrank 2.9% in the third quarter.

“Frankly, there is no room for optimism,” embattled Hong Kong Chief Executive Carrie Lam said at a business event on Thursday, ahead of the preliminary growth figures. Hong Kong will release revised GDP figures next month.

As a major trading hub, Hong Kong was already hurting from the US-China trade war and China’s slowing growth. Five months of mass demonstrations is now pushing the city toward an economic crisis.

A government spokesperson said Thursday that Hong Kong’s economic growth had been on an upward trend since last year amid a slowing global economy and US-China trade tensions, but “the situation showed an abrupt deterioration recently due to the severe impacts of the local social incidents.”

“Much of the pressure is now coming from the political unrest. The trade war itself would cause Hong Kong’s GDP growth to slow but not a contraction, while the political unrest could,” said Tommy Wu, a Hong Kong-based economist with Oxford Economics.

Economists are now predicting that for the whole year, Hong Kong will miss its earlier target of between 0% and 1% growth, and the pain could continue into next year.

Hong Kong’s GDP “is quite likely to fall into negative growth in 2019 and also 2020 […] I can’t see how the protests could end,” said Iris Pang, economist for Greater China at ING.

Wu expects Hong Kong’s economy to contract 0.1% in 2019 and “only to grow at a meager 0.6% in 2020.”

“The downside risk to the forecast is significant. If the political unrest prolongs beyond this year, I would expect next year’s GDP to contract as well,” he said.

Mass demonstrations have decimated the city’s tourism industry. Visitor numbers plunged 37% year on year for the third quarter.

Hotels are on average only two-thirds full, a drop of 28% compared to the same period a year earlier. InterContinental Hotels Group said in an earnings report earlier this month that revenue per room in Greater China fell 36% last quarter, citing “ongoing unrest in Hong Kong.” The company operates several luxury hotels located in areas frequently targeted by protesters.

Retail figures are also taking a beating as several shops have been forced to close early or shut down for a full day several times over the last few months.

Some protesters have targeted shops, restaurants and banks viewed as unsympathetic to their cause, smashing in windows, vandalizing storefronts with graffiti and even setting fire to some properties.

Last week, the city’s Financial Secretary Paul Chan announced a new round of economic measures to support businesses affected by the ongoing unrest, including slashing rents in half at properties leased by the Hong Kong government, providing fuel subsidies for taxi drivers and fee subsidies for local ferries. Those plans follow on earlier initiatives, including the allocation of 2 billion Hong Kong dollars ($255 million) to support small companies and a 19 billion Hong Kong dollar ($2.4 billion) stimulus package to help safeguard jobs and provide relief to “people’s financial burden.”

Despite the troubled Hong Kong economy, the city’s financial markets are largely holding up. The Hang Seng Index is still up 4% for the year, and the political crisis hasn’t been a deal breaker for investors yet, many of whom still see the city as an important gateway to Asia.

The IPO market is also proving resilient: In September Anheuser-Busch InBev listed its Asia business on the Hong Kong Stock Exchange raising $5 billion in the second biggest IPO of the year after Uber.

That deal pushed the amount of funding raised on the Hong Kong exchange to the third highest in the world this year after the New York Stock Exchange and the Nasdaq, according to Deloitte.

CNN