Following a strong 6.3 percent expansion last year, Hong Kong’s GDP is expected to contract by 2.5 percent in 2022 before rebounding by 4.3 percent in 2023. After the heavy blow of the fifth wave of COVID-19 in Q1 2022, domestic demand gradually recovered in Q2 as infections subsided and social-distancing measures were gradually relaxed. Economic growth in 2023 will possibly be boosted by the current gradual relaxation of quarantine requirements for inbound visitors. Headline inflation is set to increase moderately to 2.0 percent in 2022 and 2.3 percent in 2023, reflecting the economic recovery and a pass-through of imported inflation.

Financial conditions have tightened as Hong Kong dollar interest rates have risen in tandem with U.S. interest rates. The overall credit risk of the banking sector has increased but remains contained under COVID-19 relief measures. Despite the triggering of the weak-side convertibility undertaking, the Linked Exchange Rate System (LERS) remains robust, supported by ample foreign and fiscal reserves and the automatic interest rate adjustment mechanism.

The growth outlook is subject to significant uncertainties and downside risks are more pronounced. In the near term, the spread of new and more virulent variants of COVID-19 remains a major threat to Hong Kong’s economic recovery. It could lead to weaker domestic and external demand.

As Hong Kong’s economy is still in the nascent stage of recovery and the near-term downside risks are elevated, firm policy support for businesses and households should continue. Government support could prioritize the most vulnerable sectors and households to promote a more balanced recovery.