From luxury hotels and major shopping malls to neighborhood stores and restaurants in tourist hubs like Central, Causeway Bay and Tsim Sha Tsui, businesses are closing early or seeing fewer customers. Even when things are open, stores and the airport are quiet, as tourists stay away.

The city’s subway network, or MTR, was closed entirely for long stretches during the holiday weekend from Oct. 4 amid the violent backlash to Chief Executive Carrie Lam’s attempt to quell months of protests by invoking a colonial-era emergency law.

The economy in Hong Kong contracted in the second quarter, almost certainly in the third quarter and the data are still deteriorating. The question is how deep and prolonged the pain will be. Once Asia’s manufacturing powerhouse before the rise of mainland China, Hong Kong’s freewheeling consumer and finance-led economy is highly vulnerable to a collapse in confidence that has been delivered by the turmoil.

The city’s government has struggled to make the case that it has the policy tools to arrest the slide while the unrest continues.

“I do not expect to see any strong measures that can instantaneously turn things around,” said Dong Chen, senior Asia economist with Pictet Wealth Management, one of a growing chorus of experts predicting Hong Kong had a second straight quarterly contraction in the three months through September. “The best scenario is after this political unrest they can come up with longer-term planning or measures to solve structural problems.”

The effects of the U.S.-China trade war combined with a lack of tourist spending power also raises the prospect of a contraction for the full year, compared with 2018. The downturn has been rapid, as declining exports and protests have erased any economic momentum from the start of 2019. When Financial Secretary Paul Chan unveiled his budget in February, he forecast annual growth of 2% to 3% -- by August, he had slashed that forecast to zero to 1%.

Many economists see growth for all of 2019 sliding well below 1% -- JPMorgan Chase & Co.’s latest call is 0.3% -- for the weakest reading since 2009.

A variety of key economic indicators have rapidly turned south in the past few months:

Retail sales by value plunged a record 23% in August from a year earlier as demand for luxury goods such as jewelry and watches plummeted.
Tourism arrivals declined almost 40% in August from a year earlier to about 3.6 million visitors, the worst performance since the 2003 SARS epidemic, according to data from the Hong Kong Tourism Board.

Exports are expected to shrink this year to the worst level in a decade, the Hong Kong Trade Development Council warned as it slashed its 2019 growth forecasts.

Sentiment among small- and medium-sized businesses hit fresh lows in August.

The IHS Markit September whole economy purchasing managers’ index reading ticked higher, but still signals contraction at 41.5.

At a press conference Tuesday, Lam said visitor arrivals fell by more than half from Oct. 1-6, the “Golden Week” when mainland tourists usually flood Hong Kong’s shops to snap up luxury goods. Along with likely confirmation of a recession, advance third-quarter GDP figures due Oct. 31 may indicate even weaker growth forecasts for the rest of the year.

Shopping Rout

Hong Kong retailing continues to decline

Source: Hong Kong Census and Statistics Dept.

Hong Kong has had severe economic challenges before. In the early 2000s the SARS epidemic shut down the city amid fears of contracting the deadly virus. Once the all-clear came, though, visitor arrivals and business confidence bounced back. The difference now is that there’s little expectation of a rapid resolution, as positions harden on either side of the barricades.

The lack of foot traffic also means months of weakening sales among retailers at all levels, from the glitzy shops in Central to family-run small businesses. The city’s unemployment level in July ticked higher for the first time in two years, and it’s likely layoffs and store closings will increase in coming months.

“In the short term, we see the economy falling into a recession as growth pillars including trade, tourism, and finance are all under stress. The more significant risk, though, would be the city losing its reputation as a global business and financial center, which significantly undercuts long-term growth prospects.”

In response to the immediate downturn the government announced a $2.4 billion stimulus package in August including measures to benefit citizens and companies, and there may be more spending announced in Lam’s annual policy address Oct. 16. There is an opportunity to increase spending in areas such as welfare, health care services and facilities that could help to deal with longer-term issues, according to Tommy Wu, senior economist with Oxford Economics in Hong Kong.

Given the scale of the current political challenges, the August package already looks like small change, particularly in light of the government’s HK$1.2 trillion ($149.3 billion) in fiscal reserves, as of the end of March.

“A large, timely and targeted fiscal stimulus package including tax rebates and incentives can alleviate the impact of recession and stimulate the economy in the short run,” said Paul Luk, an assistant professor in the department of economics at Hong Kong Baptist University. “The future needs in different welfare areas are known. These areas should have been expanded aggressively a few years back, and it is better late than never to do it now.”