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Hong Kong's Economic Forecast Essay

1367 words - 5 pages

As Hong Kong is a small economy that is highly open to trade, it is also highly susceptible to global economic shocks. This is most recently evidenced by the GDP slowdown to 1.7% driven by negative trade developments and the inevitable drop in exports due to the global economic crisis. However, despite the weak global economy, Hong Kong's growth has rebounded due to the resilience of domestic demand along with low unemployment, most notably in low-skilled sectors. Additionally, beneficial fiscal policies providing counter-cyclical support to the economy have bolstered Hong Kong's economic health. Through such actions as waiving rates for properties, reducing public housing rents, increasing capital spending, and tax relief, Hong Kong's government has proactively strengthened its economy. Through these and other beneficial factors, Hong Kong is thus predicted to rebound to 3% GDP growth by 2013. Despite this positive economic projection, Hong Kong is not without potential risks to its financial stability through a variety of underlying causes.
The most prevalent of these risks is undoubtedly the collapse of the Hong Kong real estate market caused by a sharp and abrupt price correction. The underlying cause would be attributed to a run-up in housing prices that have doubled their trough of 2008 to a record in the past four years. According to Himaras, “Hong Kong’s apartment prices have surged to become the world’s most expensive after low interest rates and limited supply fueled demand, prompting the government to tighten mortgage lending and add taxes.” Furthermore, as the property sector represents half of the outstanding loans for use in Hong Kong, a sharp fall in price would bring about falling collateral values and negative wealth effects. These adverse effects could thus trigger an negative feedback loop between the property market, domestic demand, and bank lending. However, to safeguard against these risks, a varieties of measures have been deployed in order to prevent a potential collapse and bolster financial stability. Officials have thus enacted such measures as the continued deployment of countervailing macro-prudential measures along with fiscal measures to address concerns about demand-supply imbalances. However, the ultimate solution to the overriding problem is inherently rooted in a lack of supply, only through an increase in housing availability in the future will the crisis be averted.
Though the housing market remains a long term cause of concern, a variety of other factors pose a potential threat to the stability of Hong Kong's highly open economy. However, at the immediate forefront of these concerns would be a strong intensification of the euro area financial crisis, posing a medium likelihood with a high impact. As aforementioned, Hong Kong's highly open and small economy, along with its status as a key financial center and trading center put it at risk of adverse feedback. The financial stress imposed by the...

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