Hong Kong's Economic Growth Is Weakest Since SARS

By Nipa Piboontanasawat and Wendy Leung

Nov. 14 (Bloomberg) -- Hong Kong's economy grew at the slowest pace since a disease epidemic in 2003, as the global financial crisis cut exports and spending cooled.

Gross domestic product rose 1.7 percent in the third quarter from a year earlier, the government said today at a press briefing, after gaining 4.2 percent in the previous three months. That was less than the 2.6 percent median estimate of 16 economists surveyed by Bloomberg News.

The financial crisis has cut demand for Chinese products shipped through the city, damped confidence and slashed share prices. Chief Executive Donald Tsang said Nov. 3 that the risk of a recession in 2009 was rising even after the monetary authority slashed the city's key interest rate.

``As an open economy, exports and financial services are extremely crucial to Hong Kong and their slowdown will spill over to the domestic sector,'' said Joe Lo, senior economist at Citigroup Inc. in Hong Kong. ``A recession is inevitable.''

Quarter-on-quarter, the economy contracted a seasonally adjusted 0.5 percent after shrinking 1.4 percent in the three months through June.

The government cut today its forecast for economic growth this year to between 3 percent and 3.5 percent from the previous estimate of between 4 percent and 5 percent. The economy expanded 6.4 percent in 2007.

Consumption Cools

Household consumption rose 0.2 percent in the quarter from a year earlier, after gaining 3.2 percent in the previous three months, the government said. Business investment increased 3 percent after climbing 3.5 percent.

The year-on-year expansion was the weakest since the second quarter of 2003 when the economy shrank because of the severe acute respiratory syndrome epidemic.

The monetary authority reduced the base rate for banks by 1 percentage point last month, as well as matching cuts by the Federal Reserve. The rate is now 1.5 percent, down from 6 percent a year ago. A currency peg to the dollar means Hong Kong's rates follow moves in the U.S.

Exports rose 1.4 percent in the quarter from a year earlier, down from 4.4 percent in the previous three months. Demand for Chinese goods is slipping because of an economic slowdown that has already pushed Europe's largest economy, Germany, into a recession.

Falling Confidence

Consumer confidence fell in the second half of this year to the lowest level in four years, the Nielsen Company said, and retail sales grew by the least in 17 months in September.

The 51 percent slump in the Hang Seng Index of stocks this year has damped spending. So, too, has weakness in real estate. The number of home sales posted the biggest drop in almost nine years in October.

Companies are going bust as the economy slows. The franchisee of Krispy Kreme Doughnuts Inc., the second-largest U.S. doughnut chain, started shutting stores last month after going into liquidation.

U-Right International Holdings Ltd., operator of about 600 clothing outlets in Hong Kong and China, and Tai Lin Radio Service Ltd., a 60-year-old electrical appliance retail chain, are also casualties.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net; Wendy Leung in Hong Kong at wleung12@bloomberg.net