HONG KONG (BLOOMBERG) – Hong Kong’s economy contracted for a second consecutive quarter, with the financial hub facing mounting headwinds as interest rates rise and global trade weakens.

Gross domestic product (GDP) declined 1.4 per cent in the second quarter from a year earlier, according to advance estimates released by the government on Monday (Aug 1), weaker than economists’ forecasts for a 0.2 per cent decline.

Financial Secretary Paul Chan had signalled on Sunday that GDP would shrink in the quarter. He also said the city will “inevitably revise down” its full-year growth forecast of 1 per cent to 2 per cent in the middle of next month.

The city’s economy has come under strain as local Covid-19 restrictions curbed business and consumer activity, while outbreaks on the mainland disrupted trade. At the same time, Hong Kong’s central bank has been forced to raise interest rates to keep pace with the hawkish Federal Reserve in order to maintain the local dollar’s peg to the US dollar.

The city’s recovery in the second quarter of 2022 was “smaller than expected”, a government spokesman said in a release from the Census and Statistics Department accompanying the data.

Momentum was dragged down by continued cargo flow disruptions between Hong Kong and China, as well as from “the recent increase in the number of Covid-19 cases and tightened financial conditions”, the spokesman added.

While Hong Kong relaxed some of its social distancing and Covid-19 restrictions from April after its fifth coronavirus wave eased, retail sales and exports have been slow to rebound. The city remains one of the last places in the world to maintain strict quarantine restrictions for inbound travellers, holding back tourism and travel to the financial hub. 

Mr Samuel Tse, an economist at DBS Group Holdings in Hong Kong, said the further decline in GDP was not surprising given recent “disappointing” data for retail sales and exports. Local growth momentum remains “quite sluggish”, even if prospects may improve in the second half of the year, particularly if the city gradually reopens its border with the rest of the world, he said.

“The biggest risk is external demand and the pace of rate hikes,” he said.

Mr Chan told reporters at a briefing last week that continuous rate hikes are “disadvantageous for economic recovery”, adding that the global downturn could weigh on Hong Kong’s export performance. 

Trade has been struggling as flows to China continue to fall. Shipments to the United States and European Union flipped to a decline in June.

The government said on Monday that the threat of inflation in the US and Europe, inflamed by Russia’s invasion of Ukraine earlier this year, is expected to “dampen economic growth significantly” for the rest of the year. 

While China’s economy may see some relief, it may not be able to offset the deteriorating situation in advanced economies, it added.