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JUNE 16, 2003
Hong Kong: SARS Aside, an Unhealthy Economy Hong Kong policymakers have been distracted by the spread of SARS, which probably pushed the economy into recession. Now, with the epidemic fading, the government must deal with other problems, including deflation. Real gross domestic product fell 0.3% in the first quarter from the fourth. Compared to a year ago, real GDP grew 4.5%, less than the 5.1% gain at the end of 2002. But growth was skewed by falling prices, and the economy was much weaker than the GDP data suggest. In addition, severe acute respiratory syndrome was not identified until mid-March, so the virus' worst effects on tourism and trade will hit the second-quarter GDP data. In April, retail sales were down sharply from a year ago, visitor arrivals were off by almost two-thirds, and both exports and imports slowed. The government cut its forecast for 2003 economic growth from 3% to 1.5%. Consumers are being hurt by the rise in unemployment -- it equaled a record 7.8% in April -- as well as five years of falling prices (chart), a result of the collapse in real-estate values. Pernicious deflation has triggered wage cuts. And the drops in property values, combined with a weak stock market, are squeezing household wealth. To combat the SARS-related drag, the government has unveiled a $1 billion stimulus package. But any more help will be hard to muster. Hong Kong has had a budget deficit since 2001. In 2003, the red ink should equal more than 5.5% of GDP, even before adding in the cost of SARS. To think out of the policy box, the government has invited the public to offer ideas for sustainable development. In the short run, Hong Kong could get help from its dollar, which, like the Chinese yuan, is pegged to the U.S. dollar. The weakening currency should slow deflation as well as make exports more attractive. But with the city-state in a SARS-induced recession, what's needed are ways to jump-start domestic demand and create jobs without putting the government further in the red.  By James C. Cooper & Kathleen Madigan Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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