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SINGAPORE, December 22, 2022 – Hong Kong’s economy is expected to slow in 2022 before accelerating in 2023 after the easing of COVID-19 restrictions and on the back of strong policy support. Fiscal support for businesses and households can be more targeted to safeguard a sustained and broad-based recovery. Hong Kong authorities should also stand ready to bolster economic resilience to withstand mounting short-term risks as well as long-term challenges.

These conclusions are highlighted in the 2022 Annual Consultation Report on Hong Kong published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report is based on findings from AMRO’s virtual Annual Consultation Visit to Hong Kong in August 2022, and data and information available up to September 23, 2022.

Economic development and outlook

Following a strong 6.3 percent expansion last year, 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.

Risks and vulnerabilities

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.

A sharper-than-expected U.S. monetary policy tightening could lead to a sharp tightening of global financial conditions and a marked slowdown in the global economy, which would likely weaken Hong Kong’s economic recovery.

The outlook for Hong Kong’s property market appears challenging and a sharp downshift, should it happen, could weigh on the broader economy, although the likelihood of this is assessed to be low. The associated risks have been mitigated in part by the macroprudential measures in place. A significant slowdown of economic growth in mainland China, the U.S. and Europe would also derail Hong Kong’s economic recovery.

Policy recommendations

As the 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.

The authorities’ steadfast commitment to consolidate and rebuild the fiscal buffer is prudent and commendable. Over the medium term, the government should consider exploring options to increase fiscal revenue from more stable sources to match the trend rise in spending on key areas such as health and social welfare, and in capital expenditure.

The LERS remains an effective tool for maintaining Hong Kong’s financial and external stability. This policy regime has proven robust through multiple episodes of heightened stress over the past decades.

Hong Kong’s role as a “super-connector” between mainland China and the rest of the world will be a strong driver of growth and anchor of resilience for its economy and financial system. This role requires not just further integration with mainland China but also continued deepening of trade, financial and investment linkages with global partners. In this context, Hong Kong’s application to join the Regional Comprehensive Economic Partnership is an important move.

It is important that authorities continue to nurture new growth engines in areas such as financial technology and green finance. The Hong Kong Monetary Authority’s commendable Fintech 2025 strategy is progressing well and assisting efforts to leverage advanced technologies further. Hong Kong also acted early to establish itself as Asia’s green finance hub and is pressing ahead with initiatives to contribute to the transition in the region. To advance its high-technology aspirations, Hong Kong can also leverage the manufacturing prowess of mainland China and ASEAN, and its connectivity with these economies as a regional value chain and intellectual property hub.

Enhancing social safety nets is also essential for Hong Kong. The government is encouraged to continue its efforts to increase the supply of affordable housing, establish more formal unemployment insurance programs, and support owners and workers of small and medium-sized enterprises.

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About AMRO
The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial 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 the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

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. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.