HONG KONG (BLOOMBERG) - Economists have downgraded their forecasts for Hong Kong's economy, predicting it could contract for the third time in four years, after data on Monday (Aug 1) showed that growth is being weighed down by Covid-19 restrictions and a slump in trade.

Goldman Sachs expects gross domestic product to decline 0.5 per cent in 2022, down from an earlier prediction of 0.3 per cent growth. Bloomberg Economics now sees GDP shrinking 0.6 per cent compared with a previous projection of 0.7 per cent expansion.

The downgrades follow Monday's worse-than-expected data showing the economy contracted 1.4 per cent 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-19 restrictions locally and in mainland China.

Growth momentum is also coming under pressure as Hong Kong raises interest rates in line with Federal Reserve levels to maintain the local dollar's peg to the United States dollar.

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

Financial Secretary Paul Chan said on Sunday that the city would "inevitably revise down" its full-year growth forecast of 1 per cent to 2 per cent in the middle of the month. A city spokesman 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.

Bloomberg Economics analyst Eric Zhu said: "Given the weakness of the second-quarter numbers, we now see GDP shrinking 0.6 per cent in 2022 - worse than the 0.7 per cent expansion we forecast earlier."

Citigroup economists lowered their full-year growth forecasts for Hong Kong by a full percentage point, predicting expansion of just 0.5 per cent. Domestic demand is expected to be curbed in the second half by growing Covid-19 cases, 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 to stick to social distancing measures for Covid-19 and quarantine restrictions for inbound travellers, holding back tourism and travel to the city. While some restrictions in the city have been eased since April, retail sales and exports have been slow to bounce back.