30 August 2002

Hong Kong��s return to positive, if modest, real economic growth in the second quarter of the year, after three consecutive quarters of decline, is welcome, even if the rate of growth of 0.5 per cent in Gross Domestic Product (GDP) was slightly below Chamber expectations.

Welcome, too, is the Government��s increase in its GDP growth forecast for the full year to 1.5 per cent from the previous 1 per cent, although much of this improvement is due to the recent revision to overall GDP numbers as a result of new and better quality data.

The continued decline in current dollar value GDP (down 1.6 per cent for the second quarter) remains a concern, with only deflation tipping the real numbers into positive territory.

The SAR��s overall economic outlook therefore remains uncertain, with domestic demand and investment weak and the external environment clouded by economic and political uncertainties in the US and globally.

Nevertheless, there is the prospect of some further increase in the pace of economic growth in this, the second half of the calendar year.

The boost to external merchandise trade in the second quarter and the continuation of that improvement into July is one factor which could underpin near-term growth provided the good trade performance last month continues for the rest of the year. The expansion of service exports (up 8.6 per cent in the second quarter) should also help future growth.

A solid performance on the Mainland of China and the improvement in both trade and economic output within the east Asian region are positive, but would obviously be adversely affected by any further deterioration in the US and global economic outlook.

Within Hong Kong, domestic consumption, the key driver of overall growth, remains weak, as does the outlook for private sector investment, both in machinery and equipment and the property sector. Continuing consumer price deflation is also adding to negative sentiment.

With high unemployment, little prospect of improvement in personal incomes and general uncertainty adversely affecting confidence, there is unlikely to be anything more than a modest turnaround in either consumption or investment in the second half of the year.

At this stage, the Chamber is staying with its 2 per cent GDP growth forecast for the full year, but we will be shortly re-examining our figures in the light of the second quarter numbers and the recent revisions to GDP figures as a result of new and better data.

For further information, contact: Ian K Perkin, Chief Economist, 2823-1242