Hong Kong - Hong Kong's economy will shrink by 2 per cent this year but rebound next year to grow by 5 per cent, the International Monetary Fund (IMF) said Tuesday.

The IMF said the city's economy was on the road to recovery with unemployment expected to decline in the coming months and consumer price inflation projected to be close to zero by the end of 2010.

The IMF predictions came in a preliminary report following a mission to Hong Kong during which staff held talks with government officials and private sector representatives.

However, the IMF also warned the improving economy may lead to sharp rises in property and stock prices and said the government may need to take steps to stop asset prices spiralling higher.

The city of 7 million is already witnessing surging prices for property, raising concerns that it is heading for a property bubble like that experienced before the Asian financial crisis in 1997.

Financial Secretary John Tsang welcomed the mission's report, saying it was a "fair and balanced" assessment of Hong Kong's overall economic situation.

"We will continue to pursue the strategy of stabilising the financial system, supporting enterprises and preserving employment until the recovery is firmly in place," Tsang said.

The IMF mission visited Hong Kong in October. Its full report will be discussed by the IMF executive board in late November. (dpa)