23 December 2002                                                                                  

Deflation Holds Steady in Fourth Quarter

Hong Kong's fifth year of deflation is likely to be its last, at least in this economic cycle. It will, however, take some time for prices to stabilize, as seen in the latest figures. The Composite Consumer Price Index fell 3.6 per cent in November, from a year earlier, matching October's decline. Over 11 months the Composite CPI is down 3.2 per cent from January-November.

Utilities (electricity, gas and water) and housing fell furthest in the most recent data, dropping 7.2 per cent and 7.1 per cent, respectively in the Composite index. Durable goods (-6 per cent) were the other major contributor, extending the trend seen in recent months. Rates concessions and water and sewage charges waivers were responsible for as much as one-third of total deflation.

Mathematically, continued deep deflation will boost full-year real GDP figures as the change is prices-in this case, negative-is subtracted from nominal GDP growth. For example, a nominal 2 per cent growth in the economy, combined with a 3 per cent drop in prices would yield 5 per cent real growth: ((+2-(-3)) = +5.

The Hong Kong General Chamber of Commerce expects full-year Composite CPI deflation to be 3.2 per cent this year, and while not strictly comparable to the broader, GDP deflator, the early signs are for higher-than-anticipated real GDP growth in the fourth quarter.

Q-3 data shows Hong Kong's role in China trade

In the third quarter, 46 per cent of Hong Kong's total exports to the Mainland of China were for outward process, a slight change from previous 45 per cent in Q-2. Among domestic exports, 72 per cent were for outward processing; among re-exports, the share was 44 per cent. Some 76 per cent of importers were linked to outward processing.

By value, $77.4 billion of the quarter's total mainland-bound exports of $168.1 billion, were for outward processing, up 5 per cent over a year ago.

For further information, contact: David O' Rear, Chief Economist, 2823-1242