HONG KONG (BLOOMBERG) – Hong Kong will report a contraction in gross domestic product in the second quarter, Financial Secretary Paul Chan said, with global economic headwinds clouding the outlook for the financial hub.

GDP declined last quarter from a year ago, while improving from the previous three months, Mr Chan wrote in his blog on Sunday (July 31).

Economists surveyed by Bloomberg predict a slight contraction of 0.2 per cent in the April-to-June period from a year earlier. The data is scheduled to be published at 4.30pm on Monday.

GDP fell substantially in the first quarter as local restrictions to curb Covid-19 hit activity and an Omicron outbreak in China disrupted trade. While there was some improvement in the last quarter, Hong Kong still faces significant challenges, including rising interest rates, tough border restrictions and a global economic slowdown.

The city’s exports, consumption and investments were all affected in the second quarter by interest rate increases in the United States and Europe, Mr Chan said. The city’s government will “inevitably revise down” its full-year forecast of 1 per cent to 2 per cent in the middle of next month amid the deteriorating global economy, he said.

Mr Samuel Tse, an economist at DBS Group Holdings in Hong Kong, is forecasting a 0.6 per cent drop in GDP in the second quarter even though retail sales rebounded strongly in April and the private sector outlook picked up.

“Growth momentum in Hong Kong is quite sluggish,” he said.

Hong Kong 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.

Monetary policy in the city is also hamstrung by the local dollar’s peg to the US dollar, which means the city’s central bank has been forced to raise interest rates to keep pace with the hawkish US Federal Reserve.

“Rising interest rates will weigh on property prices, leading to a less favourable wealth effect, which could temper the pace of recovery in private consumption,” said senior economist Lloyd Chan from Oxford Economics.

Mr Chan told reporters at a briefing last week that continual rate hikes are “disadvantageous for economic recovery”, adding that the “continuous deterioration of the external environment” would drag on the economy and weigh on Hong Kong’s export performance.

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

“The downside risks of Hong Kong’s economy have risen considerably” in the second half of the year, said Dr Alicia Garcia Herrero, chief economist for Asia-Pacific at Natixis.

Without “meaningful changes” to the city’s Covid-19 policies and a recovery in China, Hong Kong may see no growth or even negative growth in 2022, she added.