"The pattern of visitors' consumption changed and average spending dropped significantly in the second quarter," Tsang wrote. Business investments have also dropped, while the unemployment rate has increased, he said.
Hong Kong's economy probably grew 2.4 percent in the April- June period from a year earlier, based on the median estimate of 14 analysts surveyed by Bloomberg News, after the first quarter's 2.5 percent pace. Expansion in the second quarter from the January-March period was projected to pick up to 0.4 percent from 0.2 percent, based on the median estimate of eight economists.
"We think the sharp deterioration in retail sales is likely to weigh heavily on headline GDP," with the economy expanding less than 2 percent in the second quarter from a year ago, Christiaan Tuntono, a Hong Kong-based analyst with Credit Suisse Group AG, wrote in a note today.
Tuntono cut his 2014 economic growth forecast for Hong Kong to 2.2 percent from 3 percent.
Retail sales in June fell 6.9 percent to $4.8 billion from a year ago, with spending on jewelry and watches down 28.2 percent, the government said July 31.
LVMH Moet Hennessy Louis Vuitton SA, the world's largest luxury-goods company, said last month that business in the city has slowed markedly. Part of the slowdown was linked to "political unrest" in the city, the company said.
Hong Kong Chief Executive Leung Chun-ying in May said he's considering limiting tourist arrivals as an influx of Chinese visitors stoke discontent. The city has also been divided over electoral reforms needed to pick its next leader, with some activists and lawmakers threatening to organize a mass sit-in in the financial district.
Tsang said he's concerned that with the economy slowing, a lack of political stability may lead to a "perfect financial storm."
Tsang said he will give the new growth forecast on Aug. 15 when the city reports the gross domestic product data.