(Bloomberg) -- Economists downgraded their forecasts for Hong Kong’s economy, predicting it could contract for the third time in four years, after data Monday showed growth is being weighed down by Covid restrictions and a slump in trade. 

Goldman Sachs Group Inc. expects gross domestic product to decline 0.5% in 2022, down from an earlier prediction of 0.3% growth. Bloomberg Economics now sees GDP shrinking 0.6% compared with a previous projection of 0.7% expansion. The downgrades follow Monday’s worse-than-expected data showing the economy contracted 1.4% in the second quarter from a year earlier. 

While some relief is expected for Hong Kong in the second half, the recovery is uncertain given the drag on demand and trade from Covid restrictions locally and in mainland China. Growth momentum is also coming under pressure as Hong Kong raises interest rates in line with the hawkish Federal Reserve to maintain the local dollar’s peg to the US dollar.

The economy shrank in 2019 when the city was engulfed by political protests, and in 2020 amid the outbreak of the pandemic. 

What Bloomberg Economics Says ... 

Hong Kong’s weaker-than-expected 2Q GDP results highlight the challenges still facing the economy: A quicker recovery requires further reopening, but rising Covid cases have complicated that. Slowing external demand and higher interest rates aren’t helping either. Given the weakness of the 2Q numbers, we now see GDP shrinking 0.6% in 2022 -- worse than the 0.7% expansion we forecast earlier. 

-- Eric Zhu, economist

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Financial Secretary Paul Chan said on Sunday that the city would “inevitably revise down” its full-year growth forecast of 1%-2% in the middle of the month. A city spokesperson said on Monday that the recovery had been held back by factors including disruptions to cargo between Hong Kong and mainland China, a resurgence in Covid-19 cases, tightening monetary policy, and inflation in advanced economies. 

Citigroup Inc. economists lowered their full-year growth forecasts for Hong Kong by a full percentage point, predicting expansion of just 0.5%. Domestic demand is expected to be curbed in the second half by growing Covid cases and continued uncertainties around the timing of Hong Kong’s border reopening with mainland China and fears of global recession, they wrote in a note.

Hong Kong is one of the last places in the world that has stuck to social distancing measures for Covid and quarantine restrictions for inbound travelers, which has held back tourism and travel to the city. While some restrictions in the city have been eased from April, retail sales and exports have been slow to bounce back.

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