Of nine economists in a Bloomberg News survey, Lai came closest to predicting a 0.5 percent contraction in the city’s economy in the second quarter. Only two of the analysts expected gross domestic product to decline from the previous three months. The government released the data Aug. 12.

“Global demand is really weak and we expect the U.S. and Europe will see a sharp slowdown, or near-zero growth, next year,” Lai said in a phone interview in the city today. “A recession is a reality for Hong Kong.”

An 11 percent decline in Hong Kong’s merchandise exports in the second quarter from the previous three months highlights the weakness, Lai said. In a note, he described the economy as the world’s “most externally-driven” and said that a slump has “grave implications.”

The technical definition of a recession is two straight quarters of contraction.

Lai predicted that Hong Kong’s economy will contract 1 percent over the 12 months ending March 31. That compares with a decline of 7.9 percent in the year through the first quarter of 2009, when the global financial crisis hobbled trade.

‘Danger Zone’

The Hang Seng Index climbed 1.9 percent as of 11:04 a.m. local time today, trimming its decline since Aug. 1 to about about 13 percent.

The global economy is “entering a new danger zone” and international policy makers need to take steps to restore confidence, World Bank President Robert Zoellick said yesterday in Sydney. A U.S. debt-rating downgrade and a widening European debt crisis triggered a global rout of equities.

In Hong Kong, there are signs that the property market is cooling. Home transactions fell to a 30-month low in July, while a land auction last week missed surveyors’ forecasts. Midland Holdings Ltd. and Centaline Property Agency Ltd., the Chinese city’s two biggest real estate agents, say home prices will decline.

In contrast with Lai’s view, HSBC Holdings Plc. economist Donna Kwok welcomed “a healthy dose of moderation” for a Hong Kong economy that she said had been running hot.

Hong Kong’s economy grew 5.1 percent in April through June from a year earlier compared with first-quarter growth of 7.5 percent.

“For the rest of this year, we expect the impact of softer western demand to be countered by continued resilient Asian domestic demand,” Kwok said in a note.