The Mainland China economy grew by 8.1 per cent in the opening months of this year, according to official figures issued on April 17. The good growth figure, which is better than expected by most analysts, further adds to the conundrum that is the Hong Kong SAR economy at the present time. Most analysts, but not the Chamber, have downgraded their forecasts for the SAR in recent weeks, mostly due to the bad news emanating from the United States. There is, however, still huge uncertainties about just how the local economy might perform in 2001.

The better-than-expected number from the Mainland definitely adds a positive note to the SAR outlook, despite the fact that is apparently due mainly to an improvement in domestic consumption and increased Government spending. Despite concerns about the US and global trade growth, the Mainland's external trade has also held up rather well in the early months of the year. This is also clearly positive for the SAR, with its substantial reliance on re-export trade out of the Mainland, although the prospect of a further slow down cannot be ruled out as the year progresses.

That said, there have also been some more encouraging economic signs from the US in recent days, with the US equity markets showing bit more bounce and some better than expected profit outcomes from major US companies. Consumer price inflation in the US has remained well under control (ruling it out as a negative factor in any decision on interest rates) and industrial output has reversed a five-month decline. Consumers have also continued to spend despite the country's economic uncertainties. These are all more positive signs, although they could admittedly reverse at any time and the better sentiment could melt away.

In the meantime, the Chamber is taking the difficult course of maintaining its original Business Summit growth forecast for the local economy. It is not without precedent, but it is certainly an unusual situation for the Chamber to be at the top end of the range of analysts' forecasts for real growth in the Hong Kong SAR economy for the 2001 year. When the HKGCC issued its growth forecast of a real 4.8 per cent expansion in Gross Domestic Product (GDP) for the current 12 months at the annual Business Summit back in early December last year, it is was indeed politically (and economically) correct to be on the bullish side.

Since then, of course, sentiment has changed and the earl months of the year saw a slew of forecast downgrades from private sector economists. Most have reduced their GDP estimates to the around the three per cent level, from four per cent or higher, but some have gone as low as 1.5 per cent and even suggested that might be on the high side. In its Budget statements, the SAR Government opted for four per cent, in line with its medium range forecast. What did Rudyard Kipling say about keeping your head while all around you are losing theirs?

Throughout all of this feverish finessing of forecast figures, the Chamber has, at least to date, maintained its GDP growth forecast at 4.8 per cent and has been on a receiving end of some odd facial expressions as a result. Yet we have maintained our position for what we believe are solid reasons. While we agree that it is a pointless exercise to stay with old forecasts once subsequent events show them clearly to be outdated, we do not believe that point has been reached in Hong Kong just yet. At the same time, we are prepared to alter our view once the evidence is available to justify it, if that need arises.

Put simply, our reasons for maintaining our forecast are three.

First, the economic situation, both in the US and here, is still too fluid to make a solid judgement on changing our headline number of 4.8 per cent real growth for the Hong Kong SAR. In terms of trade and monetary policy, the US remains the most important economy for the SAR, despite the rise in the importance of Mainland trade. Furthermore, assessments on the likely severity of the US downturn change almost day-to-day; the recent interest rate cuts are yet to have their effect; and the volatility in corporate forecasts and resultant equity market performance are clouding the judgement of many in assessing the future economic direction.

Second, in the case of Hong Kong, there has been nothing in the local statistics issued to date for the opening two months of the year to suggest that the economy is being totally blown off course. Nominal interest rates have been cut and real rates have fallen even further as deflation has eased. External trade growth has slowed, but is still in positive territory. Domestic demand has clearly been flat, but not negative. So, too, has the property market. Unemployment has risen marginally, but not significantly. Consumer price deflation has eased, but remains in place. The economy has slowed from the hectic pace of last year, but is still solid.

Third, we must remember that in all these headline forecast numbers for GDP analysts are talking so-called "real" or inflation (or deflation) adjusted figures. The prospect of an extended slow down in the US and, therefore, in Hong Kong raises the prospect, not just of slower growth, but of continuing deflation. This would have the result of "inflating" the real GDP figure, as it did in the year 2000. Last year, in fact, nominal (current dollar value) growth was just 3.3 per cent, but so-called "real" growth was 10.5 per cent after the deflation factor was taken into account.

Having recognised all these factors, we believe it is far more sensible to stay with our original December forecast of 4.8 per cent rather than downgrade it in reaction to immediate events that could turn around at any time. Certainly, we want to see more first quarter economic figures before we consider any revision of the growth number. That said, the numbers that have emerged so far for the early months of 2001 do re-affirm that real growth this year is going to be much slower than last year. Furthermore, it is likely that this slower growth will be very apparent in the first quarter - and perhaps first three-quarters - of the year.

But this does not mean that all is lost. The first quarter the current year is likely to be fairly weak, especially as it is coming off a very high real growth number of 14.1 per cent in the opening three months of 2000. The second and third quarters will also be a tough call as they both had growth last year of 10.8 per cent. The final three months of last year saw real growth ease off to 6.8 per cent, which was again off a much higher base in the final three months of 1999 (when recovery was well underway). Despite these negative factors, it is still too soon to rule out "real" (deflation-adjusted) growth of between four and five per cent.

In such circumstances it is certainly worth asking the question in our title: "If this is as bad as it gets, how good can it be?" If the US sees the worst of the downturn in the first half of the year and lower interest rates begin to have an impact in the second half of the year, the prospects for both the US and the Hong Kong SAR are enhanced. But if the present situation is "as bad as it gets" then the expectations for the local economy should not be downgraded too much. On the other hand, as other commentators have pointed out, if the US slow down is extended, Japan also slows and the European economies follow, then the outlook for Asia - and the Hong Kong SAR - is very much poorer. Trends in the next few months will be crucial.

For further information, contact Ian K Perkin on 2823-1242.