Real GDP grew by 3.1%yoy in Q2, with a sequential increase of 0.4%qoq from Q1.  We see a welcome pick-up in growth markers. Investment sentiment, credit demand, and capital market are improving. The decline in consumption also narrowed amid a weakened HKD.. We are of particular concern over higher jobless rates, rising credit risk of Hong Kong developers, and trade friction.

Investment

Gross fixed capital formation (GFCF) accelerated from 1.1%yoy growth in Q1 to 2.9% growth in Q2. System loan grew by 1.6% in June after 35 consecutive months of contraction. Lower HKD rates will serve as a key catalyst on entering 2H25. First, plunging HKD rates pave way for further stock market rally. Hang Seng index jumped by 26% in 1H, with an average trading turnover of HKD243bn per day. Loans to financials, investment companies, and stockbrokers rose 8.8%, 14.4%, and 53.2%yoy respectively. The Hong Kong Stock Exchange raised USD12.8bn through IPO fundraising in 1H, becoming the top IPO destination globally. For the same reason, overall deposits rose 11.0% through June. M1 and M2 growth also accelerated, indicating favourable capital inflow.

Second, Hong Kong government could also accelerate the debt issuance to stimulate the economy with lower interest payment. The 2Y HKGB yield has already fallen from 3.50% levels in 1Q to sub-2% of late. According to the government budget, the public debt as percentage of GDP is expected to rise from 9% to 16% in the next 3 years.

Property

Residential market sentiment improved since Q1. Lower mortgage rates aids the release of pent-up demand. Market response to these launches has been encouraging, with increased participation from Mainland buyers following the removal of property curbs. Positive rental carry amid lowered mortagae rate is prompting the return of property investors.

Looking ahead, excess property supply will likely keep prices in check. Developers are adopting flexible pricing strategies to liquidate unsold inventory. Unsold units reached the post-SARS high of over 21,200 in Q2.

Developer credit risk remains a key concern. The city's DBS Aggregate Credit Spread (DACS) index has risen 16% since the beginning of the year, contrasting with a 7% decline in China. Small and mid-sized property developers hold approximately HKD125bn in outstanding bank loans. In commercial property market, only 16 deals were recorded in Q2 2025, the lowest number since 2008. Half of these deals involved financially stressed assets. With the rising vacancy rates and stressed valuation, developers are looking at pledging more collateral. On a positive note, stable funding costs could sooth the interest payment faced by these stressed developers.

Consumption and tourism

Private consumption expenditure turned positive from -1.2%yoy in Q1 to 1.9% in Q2. While partly driven by base effect, this was supported by a weaker HKD, a 9.9%yoy rise in mainland tourist arrivals, and positive wealth effects from a stronger equity market. Thanks to the grand opening Kai Tak Sports Park, mega events are aiding tourist and domestic spendings. While retail sales growth returned to positive territory, record outbound resident travel continues to dampen local spending. The disinflationary Mainland consumer prices continue to entice Hong Kong consumers.

Job insecurity poses a challenge to domestic consumption recovery. Rising unemployment rate at 3.5% marks the highest since the COVID-19 pandemic, particularly in accommodation and food services and construction. Such concerns also reflect in consumer prices, where prices for clothing and footwear, durable goods, and basic foods fell by 4.1%, 2.5%, and 0.4%yoy in June, respectively.

Trade

Real goods exports accelerated from 8.4%yoy in Q1 to 11.5% in Q2. The city’s customs exports rose 12.5% in 1H, backed by front-loaded demand for Chinese goods and strengthening trade ties with ASEAN countries. As a key re-export hub for Chinese electronics, the extended trade truce between US and China will prolog frontloading activities. However, US transshipment tariffs on various countries could pose a risk to the demand for Chinese products via Hong Kong and other ASEAN countries.

Conclusion

We see upside risks in our full-year 2025 GDP growth forecast of 2.5%. Lower HKD rates will stimulate investment and capital market sentiment, while cushioning credit risks. A weaker HKD will help improve tourist spending.


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