Strong fundamentals safeguard the Fragrant Harbor

Hong Kong has been a solid economic performer in previous decades, with an annual average growth of +4.2% during the 2000s and +2.9% on average in the 2010s. But between 2019 and 2023, Hong Kong’s real GDP growth has been very volatile, swinging between -6.5% and +6.5%, due to factors such as social unrest, the Covid-19 pandemic, a challenging external environment, tightening monetary conditions, rising geopolitical tensions and a slowdown in mainland China. Going forward, we expect growth to settle at +2.4% in 2025 and +2.2% in 2026. A recovery in global trade supported the Hong Kong economy in 2024, while weakening exports thereafter will partly be offset by improving private consumption and investment spending such as the Northern Metropolis project and the Lantau Tomorrow Vision.

Fiscal policy has been broadly accommodative in the past years, with an annual average fiscal deficit of -4.4% of GDP since 2019, with broad-based stimulus measures to businesses and households during this period.  In 2023, the fiscal deficit reached -5.7% of GDP. It likely narrowed to -4.5% in 2024 and should continuously decrease to reach a balanced budget in the medium term, reflecting the government’s commitment to fiscal discipline and increased revenues from land sales and profit taxes. Yet, the surplus will remain low in the medium term relative to the pre-pandemic average, on the back of constraints from an ageing population and infrastructural projects.

On the monetary policy front, the Hong Kong Monetary Authority (HKMA) has limited room to maneuver as the Hong Kong dollar is pegged to the US dollar. Consequently, policy rates are primarily a function of the actions of the US Federal Reserve and have seen a cumulative increase of 525bps between 2022 and 2024. In September 2024, the HKMA lowered its policy rate by 50bps to 5.25% (in line with the Fed pivot), followed by two other 25bps cuts in November and December to 4.75%. At the same time, the high levels of liquidity in Hong Kong have reduced banks’ reliance on HKMA facilities, restricting the effective transmission of monetary policy. In terms of prices, the currency peg has broadly kept inflation under control and we expect a moderate overall price growth of +1.7% in 2024, +2.4% in 2025 and +2.5% in 2026.

The business environment in Hong Kong remains strong with internationally renowned infrastructure, the free port status, favorable policies in terms of trade and exchange controls and tax policies. The World Bank Institute’s annual Worldwide Governance Indicators 2023 survey indicates strong scores with respect to the regulatory and legal frameworks and the control of corruption. Likewise, the Heritage Foundation’s annual Index of Economic Freedom survey 2020 (the country has been discontinued since) suggest a broad-based strength in economic freedom, notably with regard to property rights, government integrity, tax burden, government spending, fiscal health, business freedom, labor freedom, trade freedom and financial freedom. Our proprietary Environmental Sustainability Index ranks Hong Kong 108th out of 210 economies, owing to a very low level of renewable electricity output and a moderate recycling rate.

We do not expect significant changes to the political landscape in Hong Kong and disruptions to business and public services are unlikely in the short to medium term especially in the context of the national security law implemented in 2020. John Lee was elected as the Chief Executive of Hong Kong following a restricted-franchise poll in May 2022 and we expect him to be selected for a second term in 2027 by the central government. While the territory will retain a high degree of autonomy under the Basic Law, a great deal of local policy steering will be influenced by mainland China’s central government.