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The economy will remain weak amid protests, the trade war

Hong Kong protesters donned Halloween masks in Lan Kuwai Fong on Thursday night, refuting an emergency law banning face cover.

Anthony Wallace | AFP | Getty Images

Hong Kong's economy is likely to "remain weak" for the remainder of this year, economists and trade experts told CNBC on Friday.

"They are hitting two fronts. Protests are affecting retail sales. This affects tourism. Plus, of course, you have an American-Chinese trade war that affects exports. So, we expect, that we are not likely to see positive growth in Q4. We will see a further contraction, "said Sian Fenner, Asia's leading economist at Oxford Economics.

The Asian financial hub slid into recession for the first time in a decade in the third quarter, according to government data released Thursday. The city statistics agency said domestic consumption is weakening amid ongoing anti-government protests. He also cited the prolonged US-China trade war as another factor, as Hong Kong reported an "increased decline" in exports.

Billy Wong, Deputy Director of Research at the Hong Kong Trade Development Council, said Hong Kong's negative growth did not exactly come as a surprise.

"The number is not so happy, but I would not say it is really a surprise. "I think Hong Kong was really expected to face an economic downturn," Wong said.

He agreed that trade war and protests were the major contributing factors to the shrinking Hong Kong economy. Wong, however, noted that while exports slowed last November, the city's GDP did not shrink until the third quarter of this year. When asked, he agreed that low consumption and a sluggish economy could lead to layoffs in sectors such as dining and retail.

But one industry has seen positive growth, Wong said. Because people are avoiding the streets, supermarkets are taking advantage as people buy more household needs, he said.

Hong Kong may see negative growth this year as the economy is driven by more than four months of social unrest, Finance Secretary Paul Chan wrote in a blog post.

Paul Yong | Bloomberg | Getty Images

Low consumer spending

Local businesses told CNBC that they are certainly feeling the financial impact of domestic unrest. Even the shops in the usually bustling Van Chai neighborhood are amazed.

Kitty Chan, who works at her parents' flower shop, said she noticed that far fewer people buy feature bouquets. She estimated that the profit had dropped by 50% for the store, which she said had been in the area for 15 years.

"If the protest continues, I think it's really gone … They'll come to buy the flower at

Andy Ho, who works at a pharmacy in Wan Tea, gave similar grim figures:" Our store has been here for 50 years . Our business has really declined in recent months – nearly 40%. "

He said that while social unrest remains unresolved, the economy" will remain weak. "

" For our store, 70% of our customers are local and 30% are tourists, among 30% of tourists 80% of them have disappeared. As for the locals, in recent months people have really been less tends to spend … the economy in the next few months will still be weak, "said Ho.

Hong Kong – a former British colony returned to Chinese rule in 1997 – has been crippled by a widespread demon of suffering since early June. Reuters reported Thursday that local police were using tear gas to disperse hundreds of protesters, many dressed in black and wearing now-banned face masks mixed with people dressed for Halloween in the city.

The Oxford Economy & # 39; Fenner said that the biggest uncertainty for the city right now is when protests will end and "until it stops" key local drivers such as retailers and tourism will struggle to grow.

China-US Trade War

In a note dated Friday, Bank of America Meryl Lynch wrote that Hong Kong could face "prolonged recession" and lower its full-year GDP forecast to 2.1% annually decline. The previous GDP forecast for 2019 predicted a more subdued decline of 0.1%.

'Hong Kong is particularly vulnerable to weakness in external demand, given its dependence on tourism and its dependence on the Chinese economy. Many sectors (tourism, retail, hotel, catering and transport) have already been hit by months of disruption to businesses. Not to mention that high levels of insecurity also significantly eroded business confidence and depressed investment demand, "the bank wrote.

The US and China were set to meet in Chile to sign a" first phase "of the trade deal. But the president Donald Trump announced that the trip was canceled on Thursday due to protests in the South American nation, adding that "a new location will be announced soon" for the two leaders to sign.

While the Oxford economy phase, "Fenner said" phase one was "probably "Will continue e.g. okay, that doesn't mean the trade war is over. She said there would probably be more flip flops, but probably no more escalation in tariffs.

"But the damage is already done. We already have tariffs, about 18% on average 18 months ago. They are now above 20%. And we are not looking to eliminate these tariffs any time soon, "Fener said.

Without an extreme view of either the protests or the trade tensions between China and the US, HKTDC's Wong said, "things will remain weak by the end of this year."

But Wong hopes that as China and the US see a slowdown in their economies, they will be more likely to strike a deal. and thus relieve some trade pressure on Hong Kong.

– Vivian Kam of CNBC contributed to this report.

Correction: This story has been updated to reflect that the Van Tea Flower Shop has been open for 15 years. A previous version mistakenly noted how long it had worked.

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