IMF lauds resilient Hong Kong economy, but warns of risks linked to Middle East war

The International Monetary Fund (IMF) has lauded the resilience of Hong Kong’s economy, noting a sustained recovery despite economic activity having yet to return to pre-Covid levels, while warning of downside risks stemming from escalating geopolitical tensions. It also urged Hong Kong to pursue medium-term financial reforms, including the introduction of a goods and services tax, to stabilise and strengthen public revenue. A concluding statement by an IMF mission that visited Hong Kong in March, which was released on Friday, forecast that the city’s gross domestic product (GDP) growth would slow to 2.4 per cent this year, from 3.5 per cent in 2025. It attributed the anticipated slowdown to weaker external demand and tighter financial conditions amid the war in the Middle East. Over the medium term, the IMF expected Hong Kong’s GDP to grow at about 2.25 per cent, with inflation rising gradually from 1.4 per cent in 2025 to 2.5 per cent. The report attributed Hong Kong’s stronger-than-expected economic growth last year to robust technology exports, improving private demand and a rebound in financial markets. It highlighted that Hong Kong had cemented its position as a global financial centre and “superconnector” between mainland China and the world. But the IMF cautioned that the city’s economic recovery remained incomplete, with several economic indicators still below pre-Covid levels. “Economic slack, while gradually narrowing, remains,” the report read. “Private investment has yet to fully recover, the labour force participation rate is at historically low levels and visitor arrivals remain below pre-pandemic levels,” it said. The report also pointed to a lukewarm commercial real estate market despite stabilising residential property prices, particularly the retail and office segments, which continue to face headwinds from structural changes in demand and elevated vacancy rates. It forecast that Hong Kong’s economic growth would be moderate, with the outlook tilted to the downside, citing escalating geopolitical tensions and intensifying conflicts in the Middle East, along with persistent commodity price pressures, higher global interest rates, trade fragmentation and heightened financial market volatility. “Given Hong Kong’s high degree of openness and financial interconnectedness, such shocks would transmit rapidly,” the report stated, noting that the more vulnerable sectors included small and medium-sized enterprises and the real estate industry. On public finances, the report projected Hong Kong’s deficits would narrow progressively over the medium term, but its consolidated deficits would persist until 2031. “While the fiscal stance in 2026 appears appropriate, efforts should focus on achieving stronger medium-term consolidation, including prioritising fiscal reforms,” the report read. It highlighted structural spending pressures arising from an ageing population, social protection needs and large infrastructure projects. “Incremental savings and selective ‘user-pay’ adjustments, while helpful, would leave the fiscal position exposed to the territory’s narrow and cyclical revenue base,” the report stated. “Broader revenue reforms will therefore be needed over time to strengthen and stabilise the revenue base.” In the latest budget, unveiled last February, the government cut recurrent expenditure by 2 per cent annually for the next two financial years, while upholding the user pays and “affordable users pay” principles to raise revenue. In response to the IMF’s concluding statement, Financial Secretary Paul Chan Mo-po said the government would analyse the mission’s recommendations. “We note the views in the concluding statement on Hong Kong’s commercial real estate sector,” Chan said, stressing that the government had introduced a series of market-stabilising policy measures. “Currently, Hong Kong’s commercial real estate market has stabilised, with transaction and leasing volumes rising significantly, and prices and rents becoming steady.” Chan also emphasised that the government’s operating account would record increasing surpluses over the next five years, reflecting the effectiveness of revenue-raising and expenditure-control measures. He noted that the consolidated deficit was largely attributable to investment in the Northern Metropolis megaproject, which would generate broader economic benefits and additional tax revenue in the long run. “Looking ahead, Hong Kong’s economic growth outlook is positive, underpinned by strong global demand for AI-related electronics, sustained growth in visitor arrivals and robust cross-boundary financial activities,” Chan said.

IMF lauds resilient Hong Kong economy, but warns of risks linked to Middle East war

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}International body also urges city to pursue medium-term financial reforms, such as introducing goods and services tax, to boost revenue

International body also urges city to pursue medium-term financial reforms, such as introducing goods and services tax, to boost revenue