Hong Kong's economy may have dropped into recession already as China's export industry begins to falter and growth in Asia is battered by a crisis in shipping and global trade.

Economists believe that year-on-year growth in the quarter running from July to September fell to about 2.5 per cent, levels not seen since the economy in Hong Kong was brought to a shuddering halt in 2003 by the Sars virus outbreak.

If that pace of contraction is confirmed this week, Hong Kong will officially be in recession. Many analysts believe that there are even worse declines in store next year as manufacturers feel the full impact of a consumer slowdown in Euope and the United States.

John Tsang, Hong Kong's Financial Secretary, said on Wednesday that the Government's full-year forecast of growth of between 4 and 5 per cent would need to be revised down tomorrow, prompting fears of a significant readjustment of the immediate outlook.

Several brokerage houses, including Morgan Stanley and Goldman Sachs, are forecasting that Hong Kong's growth in 2009 will advance at the anaemic pace of 2.2 per cent amid more dramatic declines in exports and domestic consumption.

In a note published this week, Denise Yam, Morgan Stanley's Hong Kong economist, asked clients for their understanding because her forecasts had been revised four times in three months. Hong Kong, she said, “remains extremely vulnerable to the considerable uncertainty we still face in the global economic outlook”.

The deepening gloom surrounding Hong Kong arises from three unique characteristics — factors that contributed strongly to its raging, four-year bull market but now could combine to make its economy more unstable than others in the region.

Despite surviving relatively intact through the summer, Hong Kong has begun to suffer the effects of being a global financial hub during a global financial crisis. Investment banks and other financial services firms that rushed to expand their operations in Hong Kong when Chinese growth seemed to be unstoppable are being forced to make substantial staffing cuts.

Equally critical to Hong Kong has been its immediate proximity to Guangdong, the workshop of China and one of the most heavily industrialised parts of the mainland. As American households have tightened their purse-strings, so Guangdong has taken a series of heavy blows — and the pain is being felt in Hong Kong. Half the toy factories in Guangdong have been closed and new analysis by CLSA Asia Securities suggests that as many as 20 factories per day are being shut down in the Pearl River Delta.

Yet potentially the most damaging factor for Hong Kong will be its status as the principal re-export centre for trade between China and the rest of the world. In addition to slumping global demand for the goods themselves, Hong Kong has found itself a victim of an extension of the credit crunch that has affected shipping. Shipping industry sources suggest that the entire system governing payments for cargoes as goods are transferred worldwide has been stymied by a lack of trust, hurting logistics hubs such as Hong Kong, in particular.

Sean Yokota, an economist at UBS, said that recession for Hong Kong was “inevitable”. “Economies do not operate in silos where a global slowdown impacts just the net export component of GDP and leaves consumption and investment unharmed.”

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