By Natasha Khan 

HONG KONG -- For more than half a year, antigovernment protests have gripped this city, keeping locals at home and tourists away and plunging Hong Kong's economy into a recession.

Hong Kong's economy contracted 2.9% in the 2019 third quarter from the same period a year earlier, the first year-over-year contraction in a decade. Conferences, music festivals and fireworks have been canceled; restaurants and shops closed; and companies are rethinking their future here as tear gas, clashes and travel disruptions weigh on their businesses. According to the latest government forecast, real gross domestic product for 2019 as a whole is forecast to contract 1.3%, the first annual decline since 2009.

The government -- still at an impasse with protesters -- has run advertisements and made promotional videos with the tagline "Hong Kong is On," seeking to reassure investors and visitors that the Asian financial hub remains free and stable despite the street battles. It has brushed off credit downgrades and world criticism of its handling of the protests.

Looking ahead, Hong Kong Financial Secretary Paul Chan has pointed to economic opportunities for the city linked to mainland China -- from China's infrastructure-based Belt and Road Initiative (a plan to build infrastructure spanning the globe) to the Silicon Valley-like area Beijing envisions for the Southern China region, dubbed the Greater Bay Area. Hong Kong Chief Executive Carrie Lam also has promised billions of dollars in social-welfare initiatives, including pledging to build more low-cost homes and giving easier access to mortgages for first-time buyers in a city designated as the most expensive in the world to buy a home. The government also has introduced several rounds of stimulus packages for businesses.

Yet a political solution remains elusive, making it likely that the protests will continue. To tackle the unrest -- which was sparked by a legislative measure that would have allowed the extradition of criminal suspects to mainland China for trial -- the government has called on its police force to bring demonstrators to heel, often prompting more anger from protesters who have accused the police of excess brutality.

In September, authorities announced the withdrawal of the extradition bill -- one of the protesters' five demands -- but haven't budged since on further concessions. The protests have since morphed into a broader movement opposing the government, police conduct and China's increasing encroachment on the semiautonomous city. A police watchdog report into how the force has handled the first key events of the protest is expected in coming weeks and will be closely watched as another potential flashpoint.

Meanwhile, a new cohort of pro-democracy district councilors -- many of whom were voted in in November in a resounding rebuke to the pro-China government -- could direct the movement into different directions, heightening community engagement and urging protesters to join unions in preparation for potential strikes.

Hong Kong has bounced back from two financial crises, a transfer of sovereignty to China from the U.K. in 1997, the deadly SARS epidemic, and a wave of pro-democracy protests in 2014, yet the current troubles seem set to continue.

Major transportation disruptions have eased in recent weeks, but there are still unpredictable protests. At times, the protests have taken a decidedly anti-mainland turn. In early January, hundreds of protesters in the border neighborhood of Sheung Shui chanted for mainlanders to "go home" and stop flooding neighborhood shops selling milk powder and medicines

Many buyers of those products, as well as luxury items, come from mainland China, which accounts for the largest segment of inbound tourists to Hong Kong. As the unrest intensified, many stopped visiting. Retail sales volume plunged 25.4% year-over-year in November, the government said.

The city also is caught in the U.S. and China trade tensions. Its role as a financial gateway for China, though, seems undiminished. In November, Alibaba Group Holding Ltd. raised about $11.2 billion in a secondary listing in the city, a vote of confidence in Hong Kong as a financial center.

Ms. Khan is a reporter for The Wall Street Journal in Hong Kong. Email her at natasha.khan@wsj.com.

(END) Dow Jones Newswires

January 19, 2020 14:46 ET (19:46 GMT)