Question

HONG KONG RECESSION DEEPENS AS VIRUS OUTBREAK DARKENS OUTLOOK

Hong Kong’s economy contracted for the first time in a decade in 2019 as violent anti-government protests and trade tariffs between Washington and Beijing took more steam out of the economy in the final quarter of last year.

The worst is yet to come, with no end in sight to the protests in the Chinese-ruled city and a new coronavirus outbreak in mainland China.

“The coronavirus outbreak will probably keep the city in recession for a while longer,” said Martin Rasmussen, China economist at Capital Economics. Hong Kong, which has so far seen 15 confirmed cases of the virus, has taken measures to reduce the flow of visitors from China where the death toll has risen to 361. The city’s retail and tourism sectors rely heavily on spenders from the Chinese mainland.

The economy shrank by a seasonally adjusted 0.4% in October-December from the previous quarter, versus a revised 3.0% contraction in July-September. On an annual basis, the economy shrank 2.9%, compared with a revised 2.8% fall in the third quarter. For the whole of 2019, real gross domestic product contracted by 1.2%, the first annual decline since 2009.

“The coronavirus is grabbing the headlines, but the protests haven’t gone away,” said Iris Pang, Greater China economist at ING, who expects the economy to contract by 4.5% this year and return to mild growth in 2021 “if the virus is contained”.

“Retail, catering, tourism, mass transportation are all suffering.” ANZ analysts predicted a 1.4 percentage point negative impact on Hong Kong’s first quarter gross domestic product from the effects of the virus, making it the worst hit region in Asia outside mainland China.

Capital Economics expects the virus to shave off 2 percentage points off Hong Kong’s first quarter growth.

It was always going to be tough for Hong Kong to navigate 2019, with the U.S.-China trade war bound to hurt one of the busiest trading hubs in the world.

In the past week, restaurants and shopping malls have been almost deserted, with people avoiding unnecessary exposure to large crowds and staff at many large companies working from home to protect themselves from catching the virus.

In November, the most recent data available, retail sales fell for a 10th consecutive month by 23.6% year-on-year. Tourist arrivals plunged by an annual 55.9% in November, their steepest fall since May 2003, when the city was hit by an outbreak of Severe Acute Respiratory Syndrome (SARS) which at the time caused a recession on its own.

Hong Kong — one of the world’s most important financial hubs with total banking, fund and wealth management assets worth more than $6 trillion — has pledged HK$35 billion ($4.50 billion) in stimulus to prop up the economy. Further measures are expected in a budget announcement later in February.

Assessment Tasks:

Answer all questions below:

1. Describe and explain how GDP can be measured. Discuss whether GDP is a perfect measure of economic well-being. Support your arguments with evidence.

2. “The economy shrank by a seasonally adjusted 0.4% in October-December from the previous quarter.” Explain this statement. Analyse three (3) possible factors resulting in the shrinking of the Hong Kong economy. Support your arguments with evidence.

3. Which phase of the business cycle is Hong Kong currently undergoing? Which type of unemployment is most likely prevailing? Support your arguments with evidence.

1. Discuss the effectiveness of fiscal policy and monetary policy implemented to address the current economic issues facing the Hong Kong economy. Support your arguments with evidence.

Answer 1

Answer to Part 1)

Gross Domestic Product is defined as the "total value of all Final Goods and services which are produced in any economy over a period of time which is mostly one year in measurement".

This is largely used as a yardstick in determining if or not an economy is moving in the forward direction and the amount of development which is taking place is exactly measured using the same technique.

The Gross Domestic Product can be measured in the following three ways: -

1) Expenditure Approach: -

In the expenditure approach, we calculate the various expenditures that any country has, in terms of the varying types of people or organizations which exist in the country.

The formulae for the same is "GDP=C+I+G+NE". Where C is equal to Consumption or Consumer expenditure, I am equal to Investment Expenditure, G is equal to Government Expenditure and NE is Exports minus Imports.

This tells us largely the sectors which spend money and can be used to derive the final value of goods and services from the amount of money spent to purchase the same.

2) Production Technique: -

In the production technique, we calculate the final value of goods and services produced in the economy, and deduct the expenditures incurred in raw material from the same to derive a final number. For example, the since the cost of a table includes the cost of the wood that is used to prepare the table, we only consider the price of the table itself and the wood as is a part of the table is not included in the estimation.

3) Income Approach: -

The income approach uses the technique of analysing the total revenue generated by each category of people in an economy. these include wages which are paid to people, the profits generated by investing capital, and rent earned by landlords by parting with their land.

GDP indeed is a perfect measure of economic wellbeing, and is largely used to compare numerous economies in size and value. It is evolved to become one of the critical measures of success in the recent times. This is because of the degree of accuracy which it provides in assessing growth over a period of time. Without its very emergence, it would be impossible to measure the direction in which an economy is going. For example, the degree of a recession would never be known, if GDP was not calculated properly.

Part B & C)

The current Scenario in Hong Kong is that of a recession business cycle, wherein the aggregate demand for goods and services is falling rapidly and the economy is going through a time, wherein producers to reduce their costs would fire people from their respective jobs. This leads to a situation which is known as cyclical unemployment which is present due to recession cycle.

The following are the three critical reasons for the recession cycle: -

1) The Corona Virus Pandemic has kept establishments shut. This disallows any form of growth to take place, as companies remain shut, production of goods and services does not take place and the demand has also fallen leading to an economic recession of large scale.

2) The political crisis in Hong Kong and the recent developments with China also mean that a large part of the working population is engaged in such activities which yield no benefit to the Gross Domestic Product and thus it declines in value.

3) During such a global crisis, the flow of funds from across the globe has also been low as international firms also try to limit their exposure to countries. The investment levels drying up has meant a steady decline in the Gross Domestic Product respectively.

Part D)

The fiscal and monetary policy which is being applied at present is that of expansion wherein the government is pumping an additional flow of funds into the economy. This would help in increasing the aggregate demand and provide the much-required liquidity to the market to allow for normalcy to return back.

As the government pumps in money, the interest rates go down, which largely lead to a situation whereby consumers can get loans relatively cheaply. This has been the golden standard in being able to cope up with a recession like situation and we see recent examples of countries such as the United States of America which went through a serious recession in 2008, and was able to cope up with the same primarily due to the expansion and spending activities it initiated.

Spending by the government goes directly or indirectly in the hands of the end consumer which leads to higher consumption, investment and employability in the long run.

Please feel free to ask your doubts in the comments section.