Hong Kong's Growth May Slump to Weakest Since SARS Epidemic

By Nipa Piboontanasawat

Nov. 14 (Bloomberg) -- Hong Kong's economic growth probably slumped to the weakest pace since a disease epidemic in 2003, as the global financial crisis cut exports and spending cooled.

Gross domestic product rose 2.6 percent in the third quarter from a year earlier, according to the median estimate of 16 economists surveyed by Bloomberg News, after gaining 4.2 percent in the previous three months. The government will release the figures at 4:30 p.m. today.

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.

``The possibility of a recession is growing by the day,'' Stephen Roach, chairman of Morgan Stanley Asia Ltd., said in an interview in Singapore yesterday. Hong Kong's economy is likely to contract in the first half of next year, he said.

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.

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.

More Casualties

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.

``We have a lot of challenges that Hong Kong, as an open city state faces,'' said Roach, who's a member of an economic task force in the city. ``When there is a global boom, a globalized city state benefits dramatically and when the boom goes bust, there are obviously some pressures.''

Economists have ratcheted down estimates for growth this year to a median of 3.9 percent in the Bloomberg survey, compared with the government forecast of 4 percent to 5 percent.

Weakness in exports is one of the reasons, after shipments rose 5.5 percent in the third quarter from a year earlier, down from a 7.8 percent gain in the previous three months. Demand for China's goods is slipping as the world moves closer to a recession.

Waning Confidence

``The global financial system is still struggling, and the global economy is on track for a protracted and prolonged downturn,'' said Joanne Yim and Irina Fan, economists at Hang Seng Bank Ltd. in Hong Kong. ``The economic scene in Hong Kong is unlikely to improve in the near-term.''

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 53 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.

From the second quarter, Hong Kong's economy contracted a seasonally adjusted 0.2 percent, according to the median estimate of six economists. By that measure, the city would already be in recession, after shrinking 1.4 percent in the previous three months.

-- With reporting by Michael J. Munoz in Hong Kong and Liza Lin and Arnold Gay in Singapore. Editors: Paul Panckhurst, Russell Ward.

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