Hong Kong’s service sector will be the part of the economy that sees “the biggest recovery” when borders reopen, UBP told CNBC’s Squawk Box Asia on Thursday.
However, she warned that the sector is “coming from a very fragile situation” as it shrinks in each quarter of 2022.
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“We cannot rule out the possibility of further insolvencies or bankruptcies…although things appear to be improving in the coming months,” said Carlos Casanova, UBP’s senior economist for Asia.
The latest figures from the Hong Kong government also showed that the city’s economy shrank 4.2% for the fourth quarter, the fourth consecutive quarter. Real GDP also contracted by 3.5% year-on-year.
“This contraction was much faster than we expected, our forecast was -2.8%,” added Casanova.
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However, the economist expressed optimism that Hong Kong’s economy “should be able to return to expansion” in 2023.
“We are seeing signs that there has been sequential acceleration in January. So that’s the good news,” Casanova said.
Factors contributing to possible expansion
Alongside the return of tourists from mainland China, Casanova said “more supportive stock valuations” would help lift Hong Kong sentiment.
“You also have this expectation that the Fed will hike rates at a more modest pace in 2023…that you will eventually pause,” he explained.
“And that means that these pro-cyclical headwinds that we’re seeing in Hong Kong with tighter monetary policy … won’t be that big of a drag in the coming year.”
boosting the demand for housing
Hong Kong’s real estate sector has also experienced “subdued sentiment” over the past year and, like the service sector, is “definitely also in a dangerous situation,” Casanova said.
For example, house prices fell to a five-year low in October as interest rates pushed up the cost of borrowing.
“In fact, data on the housing sector earlier this week showed that the number of mortgages that are under water is the highest it has been in 18 years,” Casanova said.
“But it only takes a very small number of mainland talent to move to Hong Kong to at least quash this correction in property prices.”
Reversing the number of negative equity mortgages will be “a very important side effect” of the reopening of borders and the recovery in domestic demand, he added.
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