The bank of China says Hong Kong's economy has reached the trough of the present downturn and will experience a mild rebound in the second half of the year.
The bank's Hong Kong and Macau regional office's quarterly report forecast growth of 4 per cent for the first six months of this year, following 3 per cent growth in the first quarter. Both figures were much lower than a year earlier.
The bank forecast gross domestic product growth for the year would be higher than last year, reaching 5 per cent, with inflation of 7.2 per cent as mild recovery took effect in the second half of this year.
The higher inflation rate would also be partly caused by rising prices on the mainland in the second half, and rising housing costs in Hong Kong following the jump in property prices this year.
It said Hong Kong's economy has reached the bottom of the cycle, with a number of sectors showing signs of recovery.
Increased activity in the stock and property markets, and stronger retail sales were all positive indicators, it said.
Economic growth was supported by improving conditions in the global economy, it said.