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Hong Kong’s real GDP growth decelerated from 5.9% yoy in Q1 to 4.3% in Q2, with sequential decline of 0.6% qoq. The slowdown reflected weaker consumption and investment sentiment, which outweighed the reduced drag from net exports. On a brighter note, external demand was resilient, supported by the ongoing AI and electronics upcycle.

Consumption and tourism

Private consumption expenditure (PCE) growth slowed from 5.0% in Q1 to 2.9% in Q2. Higher energy prices and geopolitical uncertainty weighed on inbound tourism, with Mainland visitor arrivals growth moderating from 21% yoy in Q1 to 11% in Q2. Outbound departures by local residents also eased to 6.9% yoy, helping retain local spending and cushioning the slowdown in retail activity.

We expect consumption growth to regain momentum. CNY strength should continue to support tourism inflows and improve retail competitiveness. We expect USD/CNY to head towards 6.70 by end of 2026.

Unemployment

A stabilised labour market provided footing for domestic consumption. Unemployment rate stayed at 3.7% for the past 4 months. Jobless rate in retail, construction, and services sectors extended their downtrends from late-2025 peaks. Improving property market sentiment and the rollout of Northern Metropolis projects should provide support to construction employment.

Investment

Credit demand strengthened. Although gross fixed capital formation (GFCF) moderated to 4.6% yoy in Q2, system loan growth accelerated from 6.0% yoy in May to 6.2% in June, marking the 14th consecutive month of expansion. Meanwhile, increase in inventories supported overall gross capital formation, reflecting robust trade activity and inventory stockpiling amid continued external uncertainty.

Loans to financial institutions, investment companies and stockbrokerage firms increased by 13.4%, 19.6% and 57.6% yoy, respectively, reflecting stronger capital market activity. Meanwhile, personal loan growth, which accounts for around 40% of total domestic lending, accelerated from 6.6% yoy in Q1 to 8.1%, supported by the improving residential property market.

Property

Residential property market gained further traction in 1H26, supported by a broad-based recovery in homebuyer demand. Pent-up demand continues to be released. Relaxed property measures have attracted more Mainland buyers. Policies supporting non-local students have also strengthened rental demand. Lower borrowing costs and positive carry have encouraged investors to re-enter the market.

Despite near-term headwinds from tighter Mainland controls on outbound investment and a higher-for-longer interest rate environment, the medium-term outlook for Hong Kong's residential property market is constructive. Declining inventory levels and slowing new housing completions should support a multi-year recovery. Our property team forecasts housing prices to rise by 15% in 2026, implying a further 5% increase in 2H26.

Inflation

Inflation edged higher, with CPI rising from 1.5% yoy in Q1 to 2.0% in June. While utility and transportation costs increased by 9.2% and 5.3% yoy in June, driven by sharp rises energy, broader price pressures were modest. We expect full-year CPI inflation to average 2.0% yoy, implying inflation should be steady through the rest of the year. The outlook reflects elevated energy prices and persistent geopolitical tensions, particularly developments in the Middle East, which are likely to keep imported inflation elevated.

Trade

Trade momentum was strong. Real exports of goods accelerated from 23.8% yoy in Q1 to 28.8% in Q2. Meanwhile, custom-based exports rose 39.1% yoy in 1H26, supported by stronger demand for Chinese electronics and continued export diversification. Hong Kong also benefited from the easing in China–US trade tensions, reinforcing its role as China's re-export hub. Meanwhile, import growth caught up with exports, narrowing the trade imbalance and reducing the drag from net exports on overall GDP growth.

HKD rates

Upside risk in HKD rates. 1M HIBOR eased to 2.68% from the quarter-end high of 2.95% following the FOMC meeting. We see three upside risks. First, a steeper UST yield curve and a firmer USD could push HKD towards the weak side of its trading band, increasing the likelihood of HKMA intervention. Second, resilient equity market performance should continue to support demand for HKD assets. Third, stronger credit demand is likely to lift funding costs, as infrastructure financing gathers pace and improving property market conditions encourage developers to resume land acquisitions and related borrowing.

Conclusion

Hong Kong's economy moderated in Q2 but was resilient, supported by resilient credit demand and improving asset markets. Externally, geopolitical tensions and developments in the Middle East are key risks to the global trade outlook. We raise our 2026 GDP growth forecast from 3.0% to 3.8%, reflecting stronger external demand and improving domestic fundamentals.

Hong Kong’s real GDP growth decelerated from 5.9% yoy in Q1 to 4.3% in Q2, with sequential decline of 0.6% qoq. The slowdown reflected weaker consumption and investment sentiment, which outweighed the reduced drag from net exports. On a brighter note, external demand was resilient, supported by the ongoing AI and electronics upcycle.

Consumption and tourism

Private consumption expenditure (PCE) growth slowed from 5.0% in Q1 to 2.9% in Q2. Higher energy prices and geopolitical uncertainty weighed on inbound tourism, with Mainland visitor arrivals growth moderating from 21% yoy in Q1 to 11% in Q2. Outbound departures by local residents also eased to 6.9% yoy, helping retain local spending and cushioning the slowdown in retail activity.

We expect consumption growth to regain momentum. CNY strength should continue to support tourism inflows and improve retail competitiveness. We expect USD/CNY to head towards 6.70 by end of 2026.

Unemployment

A stabilised labour market provided footing for domestic consumption. Unemployment rate stayed at 3.7% for the past 4 months. Jobless rate in retail, construction, and services sectors extended their downtrends from late-2025 peaks. Improving property market sentiment and the rollout of Northern Metropolis projects should provide support to construction employment.

Investment

Credit demand strengthened. Although gross fixed capital formation (GFCF) moderated to 4.6% yoy in Q2, system loan growth accelerated from 6.0% yoy in May to 6.2% in June, marking the 14th consecutive month of expansion. Meanwhile, increase in inventories supported overall gross capital formation, reflecting robust trade activity and inventory stockpiling amid continued external uncertainty.

Loans to financial institutions, investment companies and stockbrokerage firms increased by 13.4%, 19.6% and 57.6% yoy, respectively, reflecting stronger capital market activity. Meanwhile, personal loan growth, which accounts for around 40% of total domestic lending, accelerated from 6.6% yoy in Q1 to 8.1%, supported by the improving residential property market.

Property

Residential property market gained further traction in 1H26, supported by a broad-based recovery in homebuyer demand. Pent-up demand continues to be released. Relaxed property measures have attracted more Mainland buyers. Policies supporting non-local students have also strengthened rental demand. Lower borrowing costs and positive carry have encouraged investors to re-enter the market.

Despite near-term headwinds from tighter Mainland controls on outbound investment and a higher-for-longer interest rate environment, the medium-term outlook for Hong Kong's residential property market is constructive. Declining inventory levels and slowing new housing completions should support a multi-year recovery. Our property team forecasts housing prices to rise by 15% in 2026, implying a further 5% increase in 2H26.

Inflation

Inflation edged higher, with CPI rising from 1.5% yoy in Q1 to 2.0% in June. While utility and transportation costs increased by 9.2% and 5.3% yoy in June, driven by sharp rises energy, broader price pressures were modest. We expect full-year CPI inflation to average 2.0% yoy, implying inflation should be steady through the rest of the year. The outlook reflects elevated energy prices and persistent geopolitical tensions, particularly developments in the Middle East, which are likely to keep imported inflation elevated.

Trade

Trade momentum was strong. Real exports of goods accelerated from 23.8% yoy in Q1 to 28.8% in Q2. Meanwhile, custom-based exports rose 39.1% yoy in 1H26, supported by stronger demand for Chinese electronics and continued export diversification. Hong Kong also benefited from the easing in China–US trade tensions, reinforcing its role as China's re-export hub. Meanwhile, import growth caught up with exports, narrowing the trade imbalance and reducing the drag from net exports on overall GDP growth.

HKD rates

Upside risk in HKD rates. 1M HIBOR eased to 2.68% from the quarter-end high of 2.95% following the FOMC meeting. We see three upside risks. First, a steeper UST yield curve and a firmer USD could push HKD towards the weak side of its trading band, increasing the likelihood of HKMA intervention. Second, resilient equity market performance should continue to support demand for HKD assets. Third, stronger credit demand is likely to lift funding costs, as infrastructure financing gathers pace and improving property market conditions encourage developers to resume land acquisitions and related borrowing.

Conclusion

Hong Kong's economy moderated in Q2 but was resilient, supported by resilient credit demand and improving asset markets. Externally, geopolitical tensions and developments in the Middle East are key risks to the global trade outlook. We raise our 2026 GDP growth forecast from 3.0% to 3.8%, reflecting stronger external demand and improving domestic fundamentals.

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