(Photo: IC)

Washington (People’s Daily) -- The International Monetary Fund (IMF) on Wednesday released a report on Hong Kong’s economic outlook, which said the city is in a technical recession.

The report entitled “People’s Republic of China - Hong Kong Special Administrative Region: Staff Concluding Statement of the 2019 Article IV Consultation Discussions” states that Hong Kong's economy entered a technical recession in the third quarter, hit by external and local headwinds.

The economy is expected to recover slowly but risks have increased in the short to medium term. Financial markets remain resilient and the Linked Exchange Rate System remains the appropriate arrangement for Hong Kong SAR.

The IMF said exports and investment had been hit by factors such as trade conflicts between China and the US, while social events starting this summer had led to a significant drop in private consumption and visitor arrivals to Hong Kong.

Despite signs of a slowdown in Hong Kong's property market, which saw property prices fall about 4 percent between May and September, affordability remains tight and income inequality is significant. GDP is expected to contract by 1.2 percent in 2019 as the cyclical downturn continues.

The pace of recovery will be slower than in the past as rising trade barriers and global supply chains continue to weigh on trade-related activity. The economic slowdown is expected to cause job losses and increased unemployment.

The IMF noted that risks to Hong Kong's economic outlook are tilted to the downside. External factors include a further increase in trade frictions between China and the US that could hit global trade, reduce transit trade through Hong Kong and create negative spillovers to trade-related industries.

Local factors, a deterioration of the sociopolitical situation and delays in addressing structural challenges of insufficient housing supply and high income inequality could further weaken economic activity and negatively affect the city’s competitiveness in the long term. As house prices are highly procyclical, a significant slowdown of the economy could trigger an adverse feedback loop between house prices, the real economy and the financial sector.

But the report also makes clear that the development of the Greater Bay Area could further improve Hong Kong's medium-term growth prospects. To address the risks, the IMF recommended that the Hong Kong government provide financial support to maintain macroeconomic stability, containing housing market risks, and safeguarding financial stability.

The Linked Exchange Rate System (LERS) anchors the stability of Hong Kong SAR’s highly-open economy with its large and globally integrated financial services industry. The currency board arrangement has anchored the city’s monetary and financial stability against external shocks. And the LERS continues to function well despite increased global financial market volatility. The authorities should continue implementing policies aimed at supporting smooth functioning of the LERS to ensure credibility of the arrangement.

The IMF mission released the report after open and productive discussions with Hong Kong SAR authorities, Shenzhen Central Sub-Branch of the People’s Bank of China, and Shenzhen Municipal Financial Regulatory Bureau.