Hong Kong cut its economic growth forecast for the year as Covid outbreaks disrupt trade, the city faces higher interest rates and the war in Ukraine weighs on commodity prices.

The economy is expected to expand in a range of 1% to 2% in 2022, compared with a previous prediction of 2%-3.5%, the government said Friday. The government kept the first-quarter contraction in gross domestic product unchanged at 4%.

Authorities attributed the downward revision for the full year to the worse-than-expected performance in the first three months of 2022, along with a deteriorating outlook for exports. 

“The worsened global economic prospects may continue to weigh on Hong Kong’s export performance,” the government said in a statement, citing tensions in Ukraine that contributed to elevated commodity prices, as well as supply chain disruptions. “In the face of mounting inflation, major central banks are expected to expedite their monetary policy tightening, further dampening global economic growth.”

Financial Secretary Paul Chan had already warned Sunday that pressures from Covid outbreaks and the US Federal Reserve’s interest rate hikes would inevitably push Hong Kong to cut its growth forecast for the year.

Even though the city is gradually reopening as a devastating fifth Covid wave eases, the economy is still taking strain from weak consumer spending, a lack of tourism and a separate outbreak in mainland China, which has hampered trade. 

“The evolving global pandemic and development of China-US relations will add further uncertainties,” the government said in its statement Friday, though authorities added that transportation disruptions between China and Hong Kong “may gradually ease” as local virus infections improve. 

Economists have downgraded their GDP forecasts for the second quarter, predicting a contraction of 0.4% from a year prior, according to the latest Bloomberg survey. Growth forecasts for the third quarter were also lowered to 2.3% while estimates for the fourth quarter rose to 4.1% as the city benefits from eased virus curbs. 

For the whole year, the economy is seen growing 1%, according to the Bloomberg survey conducted before Friday’s government data. 

Economists raised their inflation projections for the year by 20 basis points to 2.3% in the survey, while the unemployment rate is expected to edge higher to 4.3% in 2022.

With Hong Kong’s monetary policy tied to the US because the local currency’s peg to the US dollar, the financial hub is having to follow the Fed in raising interest rates. So far, commercial banks haven’t raised their best lending rates, but may soon be forced to do so, adding additional pressure on businesses and consumers.

The local dollar is also weakening as higher US rates reduces the appeal of the city’s assets. The Hong Kong Monetary Authority was forced to intervene in the currency market by buying the local dollar for the first time since 2019.