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SINGAPORE, February 27, 2024 – The Hong Kong economy is poised to sustain its steady recovery, moving towards trend growth this year. With growing external uncertainties and geopolitical risks, it would be important for Hong Kong to further diversify its economic base, widen its global reach, and continue to address structural challenges such as aging population, housing supply, and social inclusion.

These conclusions are highlighted in the 2023 Annual Consultation Report on Hong Kong published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report was based on AMRO’s Annual Consultation Visit to Hong Kong which was completed on September 1, 2023, and data and information available up to November 17, 2023.

Economic development and outlook

Following a contraction in 2022, Hong Kong’s economy rebounded to record 3.2 percent growth in 2023. With the lifting of containment measures and the full reopening of Hong Kong and Mainland China earlier last year, the economy gradually revived in 2023, primarily driven by robust domestic consumption and a surge in inbound tourism. The economy is expected to grow by 3.5 percent in 2024, supported by domestic consumption, continued resumption of cross-boundary travel and tourism and the provision of targeted fiscal support. Inflation may face some upward pressures, reflecting the economic recovery and the tightening labor market, but should remain moderate for 2024.

Hong Kong’s overall external position has stayed strong, bolstered by a substantial current account surplus and ample foreign reserves. Financial conditions have tightened as Hong Kong dollar interest rates have risen in tandem with U.S. interest rates. Hong Kong’s financial system and the Linked Exchange Rate System (LERS) remain resilient, underpinned by large fiscal and foreign exchange reserves, strong and well capitalized banking system, and the automatic interest rate adjustment mechanism.

Risks and vulnerabilities

While Hong Kong’s near-term growth outlook has improved, uncertainties remain high and the risks are tilted to the downside. A protracted global trade down cycle is a significant concern, given the economy’s heavy connections with the global economy. A higher-for-longer US policy rate could lead to tighter-for-longer domestic financial conditions in Hong Kong, dampening its investment and consumption.

The outlook for Hong Kong’s property market appears challenging, which could dampen the sentiment of households and firms. A faltering economic recovery in Mainland China would also weigh on Hong Kong’s economic growth.

In the medium term, Hong Kong’s vulnerability to an escalation of US-China tensions and a broadened geoeconomic fragmentation is a major risk.

Policy recommendations

As the economic recovery is still at an early stage, it is appropriate to withdraw the pandemic induced fiscal stimulus policies in a gradual and measured manner. The smaller fiscal stimulus budgeted for FY2023 is expected to continue to support the recovery. As the recovery has been uneven across sectors, it would be appropriate for the fiscal support measures to focus on vulnerable sectors and households. The government should seek to rebuild fiscal reserves when the economy is fully recovered.

AMRO supports the authorities’ plan to phase out the financial relief measures with the normalization of economic activities. The planned termination of the financial relief schemes is not expected to have a significant negative impact on banks’ asset quality, as the ongoing recovery of the economy should help strengthen the balance sheets of the borrowers.

Addressing near-term supply-side constraints is essential to bolstering a fuller economic recovery. To ensure a full recovery in sectors such as tourism and transportation, it is crucial to resolve supply side issues in human resources and to continue providing support to firms. The policy to facilitate labor importation and attract skilled talents can significantly contribute to sustaining economic growth and strengthening Hong Kong’s position as an international financial and business hub.

The LERS remains an effective framework in maintaining Hong Kong’s financial and external stability. This policy regime has proven resilient through multiple episodes of heightened market stresses over the past decades.

AMRO supports the government’s policy measures of continuously enhancing Hong Kong’s pivotal role as a “super-connector” between Mainland China and the rest of the world as well as further strengthening financial integration with Mainland China through initiatives like the Connect Schemes and offshore renminbi business, including prioritizing the enhancement of integration within the Guangdong–Hong Kong–Macao Greater Bay Area. We note that as a committed proponent of free trade and multilateral co-operation, Hong Kong aims to grasp relevant opportunities to expand its economic ties beyond traditional markets. The government’s effort to bolster trade, investment, finance, and technology links with regions like the Middle East and ASEAN is a welcome step toward further diversifying Hong Kong’s global reach.

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute toward securing macroeconomic and financial resilience and stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support regional financial arrangements, and provide technical assistance to the members. In addition, AMRO also serves as a regional knowledge hub and provides support to ASEAN+3 financial cooperation.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing, and reporting to its members on their macroeconomic status and financial soundness. AMRO also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.