Hong Kong heading for outright recession: Nomura
Hong Kong is heading for "an outright recession," according to Nomura, following data that showed Hong Kong's Purchasing Managers' Index fell to 45.4 in June from 47.2 in May. The index is an indicator of the manufacturing sector's economic health; a reading below 50 implies it is shrinking. Hong Kong is said to be increasingly vulnerable: it was the hardest hit Asian economy following Brexit; global financial markets are expected to reduce financial transaction volumes, hurting its financial sector; and its currency being pegged to a strong US dollar does not bode well for its struggling tourism and retail sectors. Nomura also points to its "fragile property market" where it expects house prices to fall by 30% from Hong Kong's Q3 2015 peak. 

Hong Kong is on its way to "an outright recession," according to a new research note from Nomura.

The Japanese bank cut its GDP forecast for the city to -0.2% from 0.8% for 2016, and to 0.5% from 1.5% for 2017.

The territory's economy has been in bad shape for a while. After exports and GDP decreased in the first quarter, many interpreted it as the beginning of a long decline.

And now there's another reason for assuming the worst. Hong Kong's Purchasing Managers' Index — an indicator of the economic health of the manufacturing sector — fell to 45.4 in June from 47.2 in May.

A reading below 50 implies that the manufacturing sector is shrinking, and Hong Kong's PMI is strongly correlated to GDP growth. So the latest readings mean that the whole economy could be on the decline — technically putting Hong Kong in a recession.

There are a lot of things going on in the global economy that are not in Hong Kong's favor. Hong Kong is the most vulnerable economy in Asia to fall out from the Brexit, mainly because of its status as a financial hub. Uncertainty over global financial markets is likely to reduce financial transaction volumes and hurt the financial sector, according to the report.

Moreover, the US dollar is likely to remain strong, and because the Hong Kong dollar is pegged to it, the HKD is likely to remain strong, too. That's not good for the already-struggling tourism and retail industries.

Finally, the Nomura researchers are "particularly concerned about an already fragile property market." They expect house prices in Hong Kong to fall by 30% from their Q3 2015 peak — a correction that has already had and will continue to have a significant negative impact on the economy.

"The biggest risks for the economy are beyond Hong Kong's control," the report states.

If a recession isn't yet inevitable, then it's at least very likely.