Trade War to Slow Hong Kong Growth to 1%: April 23, 2025

Hong Kong’s economy is likely to decelerate meaningfully this year due to the Trump administration’s adversarial posture against Beijing. The special administrative region (SAR) of China is subject to the new 145% tariff on US imports, which is hurting activity and hampering confidence. Additionally, elevated interest rates, governmental expenditure reductions and the relatively strong exchange rate for the Hong Kong dollar are weighing on consumer spending, industrial production and wage increases. But light price pressures, tight labor conditions and robust investment flows are supporting prospects in the SAR. Still, the headwinds are particularly sizable and that’ll lead to a drop in GDP growth to 1% in 2025, down from 2.5% and 3.2% in 2024 and 2023.

Headwinds to Economic Growth

Part of the slowing growth picture can be attributed to heavy borrowing costs and abundant inventories that have hurt the SAR’s real estate sector. It has experienced lower prices and rising vacancies in light of mismatched expectations, high leverage and speculative excesses. The weakness has been broad based, negatively affecting both the residential and commercial parts of the space in the SAR and mainland China. The contraction has detrimentally impacted the critical financial sector, which depended on housing and construction for greater loan volumes and interest income. Moreover, equity declines have been painful for homeowners and investors alike, lowering borrowable funds, diminishing the “wealth effect” and contributing to dismal retail sales results. Transactions fell 15% on an annualized basis in February after adjusting for price increases and have been negative for 12 consecutive months. Furthermore, efforts to reduce the fiscal deficit to 4.6% of GDP from 6.2% are leaving the economy with less stimulus from a government outlay angle.

Trade War Weighs on Activity

Finally, the trade war is terrible for Hong Kong and last month’s S&P Global Purchasing Managers’ Index depicted a major softening. The print pointed to significant job losses as less manufacturing orders and a waning industrial outlook disincentivized hiring. To that end, business sentiment hit its lowest level since November 2020 on the back of weak demand domestically and globally as well as heightening Washington-Beijing tensions. The SAR’s closeness to the US’s Far East rival makes it vulnerable to turbulence as it’s caught in the crosshairs of the two powerhouses. US President Trump’s goals of onshoring manufacturing and substantially expanding America’s market share of international goods production is a frustration to Chinese leader Xi Jinping. The Trump plan essentially requires Chinese offshoring, including moving a portion of production to the US. This will be challenging when considering that Beijing’s great economic progress over the decades has been fueled by factory dominance. While the 145% tariff is likely to be pared back, the grapple between the world’s two largest economies will continue for years to come.