Hong Kong is on the path to an 'outright recession'

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Hong Kong is on its way to “an outright recession,” according to a new research note from Nomura.

The Japanese bank cut its GDP forecast for the city to -0.2% from 0.8% for 2016, and to 0.5% from 1.5% for 2017.

The territory’s economy has been in bad shape for a while. After exports and GDP decreased in the first quarter, many interpreted it as the beginning of a long decline.

And now there’s another reason for assuming the worst. Hong Kong’s Purchasing Managers’ Index — an indicator of the economic health of the manufacturing sector — fell to 45.4 in June from 47.2 in May.

A reading below 50 implies the manufacturing sector is shrinking, and Hong Kong’s PMI is strongly correlated to GDP growth. So the latest readings mean the whole economy could be on the decline — technically putting Hong Kong in a recession.

There are a lot of things going on in the global economy that are not in Hong Kong’s favour. Hong Kong is the most vulnerable economy in Asia to fallout from Brexit, mainly because of its status as a financial hub. Uncertainty over global financial markets is likely to reduce financial transaction volumes and hurt the financial sector, according to the report.

Moreover, the US dollar is likely to remain strong, and because the Hong Kong dollar is pegged to it, the HKD is likely to remain strong too. That’s not good for the already struggling tourism and retail industries.

Lastly, the Nomura researchers are “particularly concerned about an already fragile property market.” They expect house prices in Hong Kong to fall by 30% from their Q3 2015 peak — a correction that has already had and will continue to have a significant negative impact on the economy.

“The biggest risks for the economy are beyond Hong Kong’s control,” the report states. If a recession isn’t yet inevitable, it’s at least very likely.

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