- Hong Kong is in recession, confidence levels are at a historic low, and yet the government is spending less than 1 per cent of the city’s GDP on recovery. Then again, the Carrie Lam administration might lack the credibility to do more
In one of the most prescient analyses of the challenges confronting global policymakers, Mohamed El-Erian, an economist, investor and currently chief economic adviser at Allianz, warned in 2016 that the world economy was hurtling towards a T-junction.
It was reaching the end of the road of over-reliance on central banks' policies " which El-Erian aptly described as "the only game in town" " to treat the ills of the global economy.
The right road out of the T-junction would require a policy pivot, away from overdependence on ultra-loose monetary policy towards a new set of tools involving fiscal stimulus and structural reform. The wrong road would be to leave central banks to continue doing the heavy lifting.
Over the past year, there has been a rising awareness, both in financial markets and among governments, that looser fiscal policy is urgently needed to counter the global downturn, especially at a time of record low interest rates.
Several economies " particularly those suffering sharp contractions in output, and which have the fiscal space to spend and invest more " have been singled out as prime candidates for fiscal stimulus.
Austerity-obsessed Germany has received the most attention because of the depth of its industrial recession. However, the elephant in the room is Hong Kong. While Germany can at least take comfort from the fact that its domestic demand is holding up relatively well, Hong Kong's economy is in free fall.
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Retail sales plummeted 24.3 per cent year on year in October, their sharpest drop on record, while exports contracted 9.2 per cent, their 12th straight month of decline. Moreover, the latest survey data shows business activity shrinking at its fastest pace since 1998, with confidence levels at a historic low.
Six months of increasingly violent anti-government protests have plunged Hong Kong's economy, already battered by the trade war, into a deep recession, with no recovery in sight.
Yet, despite the severity of the downturn, the government has been providing stimulus on the cheap, eschewing shock and awe in favour of piecemeal measures over the past four months that have amounted to a paltry HK$25 billion or US$3.2 billion " less than 1 per cent of the city's gross domestic product.
For an economy suffering a full-blown crisis, and whose government sits on large fiscal reserves equivalent to 40 per cent of GDP and boasts a 15-year track record of running budget surpluses, such fiscal timidity is inexcusable.
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The International Monetary Fund said as much in its latest assessment of Hong Kong's economy published last Wednesday. In a sign of the extent to which the IMF believes the Hong Kong government is delaying the recovery by misjudging the scale of the support required to revive growth, it called for additional annual spending amounting to roughly 1.5 per cent of GDP through to 2024.
The stimulus package, moreover, should include targeted transfers to vulnerable households and small and medium-sized firms worth 2.5 per cent of GDP, which should be "significantly frontloaded to the current fiscal year".
Put simply, the IMF is urging the Hong Kong government to fire a fiscal bazooka instead of a peashooter.
Yet, while the case for more aggressive fiscal easing is overwhelming, the politics are devilishly difficult.
It is hard enough for Germany " which runs one of the world's largest current account surpluses and is now under greater international pressure to rebalance its economy by stimulating domestic demand " to offer a major stimulus package given the country's fixation with balanced budgets.
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In Hong Kong, where Chief Executive Carrie Lam Cheng Yuet-ngor's disastrous handling of the crisis has severely damaged the authority and credibility of her administration, the politics of fiscal stimulus are incomparably more difficult.
Since the mass protests erupted, the city has become ungovernable, with Lam's administration perceived as illegitimate in the eyes of much of the population.
Not only has the chasm between the protesters and the authorities widened, despite the surge in violence and the onset of a recession, Lam's efforts to mollify the protesters with handouts and relief measures have backfired by reinforcing the perception that the government is pursuing a Beijing-led strategy of using economic measures to solve a political problem.
The IMF, and most economists and investors for that matter, are underestimating the huge constraints on policymaking in Hong Kong. In the absence of some sort of compromise to ease political tensions, it is difficult to see how a fiscal bazooka could be fired, let alone hit the target.
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Yet Hong Kong's rapidly contracting economy needs to be stabilised as quickly as possible. The longer the standoff persists, the bleaker the prospects for policymaking. The pro-democracy camp's stunning victory in last month's district council elections, followed by another mass protest on Sunday, signals more unrest in the coming months.
Hong Kong has plenty of fiscal firepower. What it sorely lacks is a stable and credible government to use it more aggressively.
Nicholas Spiro is a partner at Lauressa Advisory
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