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Hong Kong protests

Recession-bound Hong Kong faces first budget deficit in 15 years

October retail sales show record decline as unemployment rises

Pro-democracy protesters hold umbrellas as they walk on a street during a standoff with police on Nov. 13 in Hong Kong.   © Getty Images

HONG KONG -- The Hong Kong government is on track for first fiscal deficit in 15 years for the 12 months ending in March, as an economic downturn and prolonged anti-government protests take their financial toll.

Showing the depth of the slump in tourism and consumer spending, retail sales suffered a record year-on-year decline of 24.3% in October, according to official statistics released on Monday.

"Due to the weak economic environment, our tax revenue and land sales have declined," Financial Secretary Paul Chan told lawmakers on Monday.

"Along with relief measures [for businesses affected by the protests] we launched since the middle of the year, the government is expected to record a deficit in the fiscal year ending in March 2020."

The government had initially forecast a surplus of 16.8 billion Hong Kong dollars ($2.15 billion).

But Chan stressed the government was still in "a healthy financial position" thanks to the large reserves it had accumulated over the years.

Analysts agreed on that point. "With over HK$1 trillion of fiscal reserves, the Hong Kong government has plenty of resources for short-term stimulus such as cash handouts and tax concessions, and to tackle longer-term issues," said Tommy Wu, senior economist at Oxford Economics.

But Wu believed stimulus measures would only have limited effect in boosting the economy. "The local economy will remain under pressure and unlikely to see significant rebound before an eventual end of the protests," he said. Wu expected the economy to contract 1.4% this year and 1.3% next year.

In the third quarter, Hong Kong sank into recession for the first time in a decade, with gross domestic product shrinking 2.9% from the same quarter last year.

Despite the multiple rounds of relief measures offered by the government, the retail and tourism sectors saw few signs of recovery.

The sales of jewelry, watches and valuable gifts -- items popular with mainland Chinese shoppers -- were hit the most, slumping 42.9% in October, traditionally a peak tourist season. Total visitor arrivals in October dropped 43.7% on a yearly basis as hotel room occupancy reached only 68% compared with 92% a year ago.

A government spokesperson blamed the increasingly violent protests for the poor figures. The spokesperson said the protests "depressed consumption sentiment" and "severely disrupted tourism- and consumption-related activities."

"Ending the violence... and restoring social order are crucial to the creation of an environment for the retail business to recover," the spokesperson said.

Other worrying signs emerged in the labor market. The unemployment rate in the restaurant sector between August and October rose to its highest level in more than six years at 6.1%. In the retail sector, unemployment rose to 4.5%, the highest level in more than two years.

Annie Yau Tse, chair of the Hong Kong Retail Management Association, said an increasing number of employers are asking their workers to take unpaid leave or to reduce their working hours. She said some stopped hiring replacements when workers left.

Tse said an immediate retail recovery is not likely even if the protests stop, as it takes time to lure tourists back. "We believe retail sales in the first half of next year will not see a major improvement," she said, predicting a double-digit decline for full-year sales in 2019.

Wu from Oxford Economics said if protests continued into 2020, more retail outlets, restaurants and other companies in tourism-related sectors would go bust. "We may see a spike in unemployment by then," he said.

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