Hong Kong Enters Recession

By CHESTER YUNG, The Wall Street Journal 

HONG KONG -- Hong Kong joined the growing list of economies that have slipped into recession as growth in the third quarter was hit by softening global demand for goods and services, prompting the government to cut its economic growth forecast for 2008. 

Hong Kong's gross domestic product fell 0.5% from the previous quarter on a seasonally adjusted basis, following a fall of 1.4% in the second quarter, according to government data released Friday. 

Economists predict this economic downturn will be deep as the world struggles to recover from the financial crisis. They said Hong Kong is now in a technical recession as the economy has contracted on a quarterly basis for two consecutive quarters, and expect that it will worsen next year and possibly last until 2010. 

"This is only the beginning of the economic aftershock, and the territory will likely continue to suffer from tremors in the coming quarters," DBS economist Connie Tse said. 

"The local economy can no longer rely on household spending and private investments to fuel growth," Ms. Tse said. "The melt down in the equity market and declining job security have left business and consumer confidence flagging." 

The Hong Kong government also cut its full-year 2008 GDP outlook to 3% to 3.5% from the previous 4% to 5% forecast, but kept its expectations for the consumer price index unchanged at 4.2% for the full year. Last year, Hong Kong's economy grew 6.4%. 

The government said the economy was hit hard in September as the "outbreak of the global financial tsunami" battered the local stock market and hurt consumption at the same time weak external demand slowed exports. 

Irina Fan, senior economist at Hang Seng Bank, said Hong Kong won't recover until 2010 "at the earliest." 

"The whole world has changed radically since September, and we expect the recession will deepen," Ms. Fan said. 

Hong Kong now joins the European Union, Germany, Singapore and New Zealand as an economy in recession. Japan is close to recession and will release its third-quarter GDP figures Monday. 

Hong Kong's last recession came in 2003 when the SARS outbreak devastated the economy in the first and second quarters. While that was a sharp downturn, the recovery was quick as the disease was contained. 

Core-Pacific Yamaichi economist Benny Lui said the situation now is worse than it was during the SARS outbreak. 

Government economist Helen Chan said Hong Kong was in better shape now than it was during the 1997-98 financial crisis, though she acknowledged it wasn't clear if a turnaround can begin next year. 

On a year-to-year basis, Hong Kong's economy grew 1.7% in the July-September quarter, slowing sharply from the second quarter's 4.2% year-to-year rise. 

—Jeffrey Ng and Jackie Cheung contributed to this article. 

Write to Chester Yung at chester.yung@dowjones.com