Although the economic situation is expected to further pick up in the fourth quarter, the sluggish economic performance in the first nine months of the year will nevertheless drag the year's overall growth, Chan said.

"The solid third quarter economic growth and upbeat October data lead us to become increasingly convinced that a modest recovery is underway," Hang Seng Bank said in an email note on Friday, predicting a full-year growth of around 1.5 percent for the year.

Expecting the city's GDP to recover gradually, Hang Seng Bank said the growth should climb up to around 2.5 percent in the fourth quarter and settle near 3 percent in 2013.

Meanwhile, the property market remains hot amid a cooling economy. Residential prices rose further by 6 percent over June, representing some 20 percent surge in the first nine months of 2012, surpassing the previous peak in 1997 by around 26 percent, government data showed.

Mortgage payment to income ratio also worsened to around 50 percent during the third quarter, said Chan, who added that the increasing burden to Hong Kong families also signified "a mounting risk of a property bubble in the city".

However, speculative activities have basically become extinct in the market after the government recently imposed the Special Stamp Duty (SSD) on short term home resales.

The upgraded version of the SSD introduced in late October together with the new Buyers' Stamp Duty (BSD) that slapped an unprecedented 15 percent tax on home buyers who were not permanent Hong Kong residents are expected to further cool home prices after the market showed increasing signs of exuberance and the build-up of a bubble risk, said the government.

The government also lifted its headline and underlying inflation forecasts for 2012 to 3.9 percent and 4.5 percent, respectively, from estimates of 3.7 percent and 4.3 percent made in August. Global food prices hike, inflow of hot money, and the renewed pick-up in local residential rentals will work together to push up prices in the city, said the government.

litao@chinadailyhk.com