HK and Sweden Economic Policy during Covid

Prior to the COVID pandemic, both the economies of Hong Kong and Sweden were among the best performing in the world.

• Hong Kong ranked 35 out of all the major economies. Driven by strong consumption, investment and exports, Hong Kong’s GDP had expanded steadily at an average rate of close to 3% from 2014 to 2019. Unemployment declined to 2.4% in 2018 from 3.6% in 2014.

• Similarly, the Swedish economy was among the best performing of the OECD countries. Its GDP had also expanded steadily at an average annual rate of close to 3% from 2014 to 2019. Unemployment declined to 6.3% in 2018 from 8% in 2013.

At the same time, both Hong Kong and Sweden enjoyed strong government finances. In 2019, the Hong Kong government debt-to-GDP ratio was one of the lowest in all of Asia at around 42%, while Sweden’s was the lowest since 1977 at below 40%. Hong Kong’s government budget surplus was 5.5% and 2.1% of GDP in 2018 and 2019, respectively, and Sweden’s was 0.6% and 0.8% of GDP in 2018 and 2019, respectively.

Then came COVID. The pandemic that began in early 2020 greatly affected the economies of most countries in the world and put both Hong Kong and Sweden into a recession. The governments of Hong Kong and Sweden employed many different tools to try and lessen the negative impacts of the recession. Chief among them were fiscal and monetary policy.

Monetary policy consists of the actions of central banks to achieve certain economic objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the tax and spending policies of the government. Governments can use both monetary and fiscal policy to meet their economic objectives.

In comparing the two policies, monetary policy tends to have a more general impact, while fiscal policy can target certain sectors or market participants to have a relatively greater impact on specific parts of the economy. Other differences between monetary and fiscal policy include the time to enact the policy and the time for the policy to take effect. Since monetary policy is decided by central banks (the HKMA and the Riksbank) and not by the government directly, often in the form of rate changes or bond purchases or sales, it is usually enacted faster. In addition, the effects of the monetary policy can often be felt even before it is enacted because once the central bank signals its intentions, other banks make corresponding changes to the money they supply.

Fiscal policy that requires government decisions on budgets and spending can often take longer to implement and can be politically motivated. However, once implemented, the effects of fiscal policy can happen faster. For example, government hand-outs can be spent to lead to an immediate shift in demand. On the other hand, aside from the signaling effect, macro effects of monetary policy generally occur after some time has passed and can take months or even years to materialize.

As noted, at the start of the pandemic, both Hong Kong and Sweden had very little debt and a large government surplus that could be deployed to boost the economy. So, both governments used fiscal policy to spend heavily during 2020 and 2021. Hong Kong spent equivalent to about 5% of GDP, and Sweden spent more than 10% of GDP.

Both governments also used monetary policy, but to a lesser degree. In Hong Kong’s case, since one of the HKMA’s key objectives is to maintain currency stability within the framework of the Linked Exchange Rate System whereby the HK dollar is pegged to the US dollar, Hong Kong could not cut its benchmark interest rate on its own without hurting its linked exchange rate system. In Sweden, monetary policy was also a less useful tool than fiscal policy during the pandemic because the country was already pursuing an expansionary monetary policy pre-COVID, with interest rates very low.

In summary, during COVID Hong Kong and Sweden employed both fiscal and monetary policy. Without independent monetary policy, aggressive fiscal stimulus became even more necessary to react to the pandemic in the case of Hong Kong. Sweden also used more fiscal measures since interest rates were already very low at the start of the pandemic.

The result of the policies employed is that both Hong Kong and Sweden were able to come out of the pandemic with a reasonably strong economy. Since Sweden has since lifted all pandemic measures and opened its economy to pre-COVID levels, the country has been able to bounce back more easily that Hong Kong which has chosen to keep some of its strict COVID policies. It remains to be seen what each economy will look like as the world enters a downturn following interest rate hikes to combat inflation, restrictions on global trade caused by geopolitical issues, overall uncertainty, and other issues.

To read more details on Hong Kong and Sweden’s economic policies during COVID, see my other blog posts on these topics.