Hong Kong could fall into recession due to Brexit: Nomura

Damage from Brexit could result in Hong Kong being thrust into recession warns Nomura, pushing the city's economy to shrink by 0.2% in 2016. Asia’s economies are very open and therefore vulnerable to the exposure of Brexit via trade, says Nomura, and Hong Kong is the most exposed. Hong Kong’s economy has already contracted 0.4% in 1Q16, compared to 4Q15, due to weak exports, retail sales, and a huge slowdown in the housing market, largely as a result of China’s slowdown. Furthermore, Brexit will keep the US dollar strong, and therefore also the HK dollar which is pegged to it; this will “have a negative impact on Hong Kong’s tourism and retail sales, especially if it means a weaker RMB". 

The collateral damage from Brexit will affect economies around the globe, and Asia is no exception. Expect “waves of contagion” in Asia after the UK’s vote to leave the European Union, analysts from Japanese brokerage firm Nomura warned today (June 28).

Because of Brexit, Nomura lowered its aggregate 2016 GDP growth forecast for Asia, except Japan, from 5.9% to 5.6%. The financial hubs of Hong Kong and Singapore will suffer the most, thanks to their “very open economies” and “more managed exchange rates,” Nomura’s chief economist Rob Subbaraman said.

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Most alarmingly, Brexit will push Hong Kong into recession, with the city’s economy shrinking by 0.2% in 2016.

Hong Kong’s economy already contracted 0.4% in the first quarter of 2016, compared to the last quarter of 2015, thanks to weak exports, retail sales, and a huge slowdown in the housing market, largely related to China’s slowdown.

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Nomura analysts said they were “particularly concerned about an already fragile” property market.

Analysts have previously warned Hong Kong could face a recession, which is technically defined as two quarters of negative economic growth. Now Brexit makes that scenario almost certain.

In general, Asia’s economies are very open and therefore vulnerable to Brexit exposure through trade, Nomura noted—and Hong Kong is the most exposed. Hong Kong’s exports of goods to the EU in 2015 accounted for 14% of its 2015 GDP, the highest in Asia. Overall, Hong Kong’s merchandise exports are valued at 150% of GDP (much of that re-exports from China), also the highest in the region.

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The Brexit will also keep the US dollar strong, and consequently the HK dollar, which is pegged to it. This will “have a negative impact on Hong Kong’s tourism and retail sales, especially if it means a weaker RMB,” Nomura said.

Financial services are another reason Brexit will hurt Hong Kong. UK banks contributed 2.6% of Hong Kong’s GDP in 2015, the second highest in Asia after Singapore, and they are likely to reduce their exposure to Hong Kong after Brexit, Nomura warned.

Hong Kong companies with large exposure to the UK—including HSBC and Cathay Pacific Airways—are leading a stock sell-off in Hong Kong for the third trading day in a row.