Hong Kong cuts GDP growth forecast as risks mount with Covid

HONG KONG cut its economic growth forecast for the year as pandemic restrictions curb spending and the city faces higher interest rates.

The economy is expected to expand in a range of 1 per cent to 2 per cent in 2022, compared with a previous prediction of 2 per cent to 3.5 per cent, the government said on Friday (May 13). The government kept the first-quarter contraction in gross domestic product (GDP) unchanged at 4 per cent.

Financial Secretary Paul Chan had already warned on Sunday that pressures from Covid outbreaks and the US Federal Reserve’s interest rate hikes will inevitably push Hong Kong to cut its growth forecast for the year.

Even though the city is gradually reopening as a devastating fifth Covid wave eases, the economy is still taking strain from weak consumer spending, a lack of tourism and a separate outbreak in mainland China, which has hampered trade. 

Economists have downgraded their GDP forecasts for the second quarter, predicting a contraction of 0.4 per cent from a year prior, according to the latest Bloomberg survey. Growth forecasts for the third quarter were also lowered to 2.3 per cent while estimates for the fourth quarter rose to 4.1 per cent as the city benefits from eased virus curbs. 

For the whole year, the economy is seen growing 1 per cent, according to the Bloomberg survey conducted before Friday’s government data. 

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Economists raised their inflation projections for the year by 20 basis points to 2.3 per cent in the survey, while the unemployment rate is expected to edge higher to 4.3 per cent in 2022.

With Hong Kong’s monetary policy tied to the US because the local currency’s peg to the US dollar, the financial hub is having to follow the Fed in raising interest rates. So far, commercial banks haven’t raised their lending rates, but may soon be forced to do so, adding additional pressure on businesses and consumers.

The local dollar is also weakening as higher US rates reduces the appeal of the city’s assets. The Hong Kong Monetary Authority was forced to intervene in the currency market by buying the local dollar for the first time since 2019.