Hong Kong’s economy and financial system remain resilient despite pronounced deterioration of growth and employment conditions due to the COVID-19 pandemic. Solid macro fundamentals, labor market flexibility, high levels of foreign and fiscal reserves, and the banking system’s ample buffers have underpinned the resilience of the economy to severe strains. Growth is expected to contract by 7.5 percent for this year and is projected to grow by 4.5 percent for 2021.

Looking ahead, recurring outbreaks of COVID-19 could be a major drag on the economy through severe dampening of domestic activities as well as exports including trade-related and tourism-related activities. Rising US-China tensions could hinder the pick-up of trade activities globally, and continue to affect Hong Kong given its highly open economy and role as a gateway to China. Further worsening of credit quality for hard-hit sectors and SMEs will pose challenges for banks and bank supervisors, although the banking sector will likely remain resilient and be able to provide supportive financing.

Moving forward, strong and concerted policy efforts are expected to lead to the recovery of growth and employment in the later part of 2020 and in 2021. In the long run, policy efforts should also aim to boost long-term growth potential and resilience to large shocks as well as to enhance inclusiveness and strengthening social safety nets.