The International Monetary Fund (IMF) Executive Board has concluded its Article IV consultation discussions with the People’s Republic of China—Hong Kong Special Administrative Region, endorsing the staff appraisal without a formal meeting. The discussions focused on Hong Kong SAR's gradual but uneven economic recovery after three years of recession beginning in 2019.
Following the removal of COVID-related restrictions in early 2023, Hong Kong experienced a rebound in domestic demand and tourism. However, this momentum has slowed due to high interest rates and adjustments in the property market. Increased regional competition is also affecting traditional growth sectors. Despite these challenges, the financial system remains resilient with substantial capital and liquidity buffers.
Real GDP growth for 2024 is estimated at 2.7 percent, down from 3.3 percent in 2023, with medium-term growth expected to slow further to around 2½ percent due to demographic changes and reduced physical capital contribution. Inflation is projected to gradually rise to about 2½ percent.
Risks are skewed towards the downside, including potential slowdowns in Mainland China due to trade tensions or property market adjustments, prolonged tight monetary policy in the U.S., and rising geoeconomic pressures. Conversely, improved confidence in Mainland China and integration with the Greater Bay Area could bolster growth.
The IMF highlighted that while Hong Kong's economy is recovering from past shocks, emerging challenges require attention. Tight financial conditions and property sector adjustments are affecting economic momentum, while aging demographics and labor force issues pose long-term challenges.
A fiscal consolidation path is deemed appropriate; however, increased revenue mobilization efforts are necessary to address aging-related expenditures and investment needs. Suggestions include increasing tax progressivity and introducing new taxes such as VAT.
While Hong Kong's banking sector is strong, proactive risk monitoring is advised due to weakening debt servicing capacity among local firms. Policy support for SMEs should balance between necessary assistance and allowing non-viable firms to exit orderly.
Further macroprudential easing should be cautious, alongside expanding public housing supply to address affordability concerns. Additionally, creating a regulated digital finance ecosystem would enhance Hong Kong's status as an international financial center.
Efforts under the Greater Bay Area initiative could boost growth by fostering technology clusters and attracting skilled labor. Climate change challenges remain significant; thus regional collaboration with Mainland China on zero-carbon energy development is encouraged.