Hong Kong’s economy finished 2025 with a solid burst of growth, helped by falling interest rates that eased pressure on households and supported consumption, even as the outlook for next year appears more restrained.

According to a note from Capital Economics, preliminary figures for the fourth quarter show gross domestic product expanding by 3.8% from a year earlier, a slight acceleration from the revised pace in the previous quarter. On a quarterly basis, growth also edged higher, underscoring an improvement in momentum towards the end of the year. For 2025 as a whole, the economy grew by 3.5%, marking its strongest performance since 2017, excluding the exceptional rebound that followed the pandemic.

Although official data provide only annual comparisons, seasonal adjustments point to a pick-up in household spending in the final months of the year. Easing US monetary policy fed through to local funding conditions, pulling down the Hong Kong interbank offered rate by around half a percentage point during the quarter. Given the prevalence of variable-rate mortgages, lower borrowing costs translated into reduced monthly repayments, lifting disposable incomes and underpinning consumption.

External demand also improved. Exports recovered on a quarter-on-quarter basis after contracting earlier in the year, contributing to the broader strengthening in activity. By contrast, investment growth cooled slightly, having been a key driver of the economy’s earlier resilience. The loss of momentum in equity markets during the quarter appears to have weighed on financial sector activity, though investment remained one of the main pillars of growth over the year as a whole.

Since the turn of the year, the Hang Seng index has regained lost ground, a development that should help sustain financial services activity into 2026. However, with limited scope for further interest rate cuts from the US Federal Reserve, the boost to household spending is likely to fade. Export growth is also expected to moderate as global demand softens.

Taken together, these factors suggest that Hong Kong’s economy will continue to expand, but at a slower pace. Growth is expected to ease to around 3% in 2026, reflecting a shift from last year’s rate-driven support to a more balanced, but less dynamic, expansion.