The difficult recovery in economic activity experienced over the past two years reflects all of the constraints on the Hong Kong economy. Monetary policy, which must follow the United States' monetary policy, was restrictive until September 2024, with particularly painful consequences, as inflation in Hong Kong remained moderate and domestic demand, conversely, needed support. The economic cycle is much more in sync with mainland China's economic cycle. In the very short term, economic growth is expected to accelerate, supported by ongoing monetary easing and the expected strengthening of Chinese demand. In the medium term, Hong Kong’s prospects hinge on its continued economic and financial integration with mainland China.
The Hong Kong economy is struggling to recover from the series of shocks experienced between 2019 and 2022. Following political and institutional upheavals in 2019 and 2020, the territory was severely affected by the health crisis up until last year. In 2023, activity is recovering, but Hong Kong is now facing the weakening in external demand and, above all, significant tightening of monetary conditions. The rise in interest rates since March 2022 has impacted domestic demand, particularly through its effects on the property market. Fiscal policy, meanwhile, remains resolutely expansionary.
The economic growth recovery has been unbalanced since the health shock in early 2020 and has rapidly lost steam. It was then interrupted in the first quarter of 2022, due to a very sharp rise in the number of Covid-19 infections and deaths linked to the Omicron variant. The epidemic wave is starting to recede, but Hong Kong will now have to face the effects of a slowing global trade, rising commodity prices and the tightening of US monetary policy. Despite these unfavourable conditions, sovereign solvency remains very robust and the government keeps a strong capacity to continue an expansionary fiscal policy.
The Covid-19 pandemic strikes an economy that has already been weakened by several quarters of decline in merchandise exports, tourism, private consumption and investment. Since February, the government has launched a major fiscal stimulus plan representing about 10% of GDP. The plan includes direct support measures in favour of corporates and households. Additional structural measures will be needed going forward, in order to fuel a sustainable rebound in private demand and bolster medium-term economic growth prospects. Thanks to abundant fiscal reserves and minimal debt, the government has comfortable manoeuvring room to pursue an expansionist policy for several years to come.
Hong Kong is a free market economy with a liberal regulatory framework, an efficient payment system and sound macroeconomic fundamentals. Hong Kong’s high degree of trade and financial openness makes it very reliant on world demand and global capital flows while its currency board system (the HKD is pegged to the USD) means its monetary policy is tied to that of the US Federal Reserve. At the same time, the Hong Kong economy is highly integrated with Mainland China, through trade, tourism and financial links.
Annual average real GDP growth slowed to 2.8% in 2014-2018 from 3.5% in 2007-2011. The Hong Kong economy fell in recession in 2019 due to slower world trade growth, slower Chinese growth, US-China tensions, social protests and weaker domestic confidence. The Covid-19 shock only added to the woes. Hong Kong’s medium-term economic outlook has been weakened by recent institutional and legal developments. At the same time it remains supported by its strong macroeconomic fundamentals, high-quality services sector serving as a gateway to Chinese markets and role as a key financial hub for Chinese firms.
