(Bloomberg) -- Hong Kong’s economy just can’t catch a break.
Having briefly shown signs of recovery in recent months from its deepest recession on record, the Asian financial hub is bracing for its stiffest test yet as a resurgent virus combines with an increasingly uncertain political and financial outlook.
Hong Kong is facing fundamental questions about its long-term role as an international finance center, amid signs that tech firms are abandoning the city and global companies are spurning its once-vaunted legal system after imposition of a national security law. While that’s happening, the more immediate prospects for growth are deteriorating by the day as the coronavirus case count spikes.
“There is no light at the end of the tunnel; we have written off any possible chance of profits for the rest of the year,” said Douglas Young, co-founder and chief executive of lifestyle and fashion retail chain Goods of Desire. “In the long term, I am optimistic that we shall get over this crisis, but our lives will be different.”
Hong Kong will have an update on July 29 on where things stand when the government reports second-quarter economic growth figures. Economists forecast an 8.7% contraction from year-ago levels, almost equaling the record 8.9% decline posted in the first quarter.
Hong Kong reported a record 111 local virus cases Thursday, according to local officials. The government has extended civil servants’ work-from-home plan for another week, to Aug. 2, according to a statement on its website.
While urging residents to stay at home, Hong Kong’s government as yet has not mandated a full lockdown.
Empty storefronts are becoming a common scene in the city’s shopping districts, where a little more than a year ago they were packed with tourists. Those shoppers disappeared amid months of street protests and then border lockdowns triggered by the coronavirus.
Causeway Bay on Hong Kong Island had a vacancy rate of 7.9% in the second quarter, compared with zero a year earlier, while Mong Kok in Kowloon has a vacancy rate of 24%, quadruple that of a year ago, according to property broker Cushman & Wakefield Plc. The firm expects the rate to continue to rise in most retail districts in the second half.
“I am not feeling optimistic about the outlook for the city because there are lots of uncertainties,” said Tommy Wu, senior economist with Oxford Economics in Hong Kong. He forecasts a 9.5% contraction year-on-year in the second quarter, and a 6% decline in GDP for 2020. “If the third wave of virus infections prolongs, I would expect a much greater wave of business closures in the coming months.”
Slow Traffic
Syed Asim Hussain, co-founder of hospitality group Black Sheep Restaurants, which operates 25 restaurants in Hong Kong and employs about 1,000 people, said about 80% of sales have been erased by the latest virus restrictions that include a ban on dining in after 6 p.m.
Hussain and co-founder Christopher Mark have avoided laying off staff this year yet have implemented salary reductions.
“The short-term outlook does not look good,” he said of the prospects for Hong Kong’s restaurant industry. “We have been lobbying the government for support, a little bit more support with the landlords.”
Some landlords such as Edwin Lee, CEO of Bridgeway Prime Shop Fund Management, said they are offering tenants rent reductions of as much as 50%. “It’s better than letting them quit their businesses and leaving the shops vacant,” he said.
Rent is such a significant issue in Hong Kong that an extended lockdown might end up being preferable for some, as it could allow some retailers to declare force majeure and relieve their lease burden, said Samy Redjeb, managing director with luxury brands distributor The Bluebell Group.
“The only positive of Hong Kong was the pandemic was under control until the end of June, when sales picked up slightly, and now that is gone,” Redjeb said. “Borders are not re-opening soon and after a year of down trend, and the constant battle on rents, many retailers are facing difficult questions as to their future in the city. It’s extremely sad.”
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