It means the economy has contracted for two quarters in a row, which is the usual definition of a recession.
Tourists are staying away and shops are suffering amid battles between anti-government protesters and police.
"Domestic demand worsened significantly in the third quarter, as the local social incidents took a heavy toll on consumption-related activities and subdued economic prospects weighed on consumption and investment sentiment," the government said in a statement.
It now expects the economy to shrink 1.3% for the full year.
"Ending violence and restoring calm are pivotal to the recovery of the economy. The government will continue to closely monitor the situation and introduce measures as necessary to support enterprises and safeguard," the government added.
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Why are there protests in Hong Kong?
Hong Kong - a British colony until 1997 - is part of China under a model known as "one country, two systems".
Under this model, Hong Kong has a high degree of autonomy and people have freedoms unseen in mainland China.
The protests started in June after the government planned to pass a bill that would allow suspects to be extradited to mainland China.
Many feared this bill would undermine the city's freedoms and judicial independence.
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The bill was eventually withdrawn but the protests continued, having evolved into a broader revolt against the police, and the way Hong Kong is administered by Beijing.
Protests have taken place every weekend over the past few months, causing widespread disruption and a number of deaths.
On Thursday, a 70-year-old cleaner died after he was hit in the head during a protest in the Hong Kong border town of Sheung Shui.
Video purported to be of the incident shows two groups throwing bricks at each other before the man falls to the ground after being struck on the head.
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