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Chamber revises SAR growth forecast

Faced with weaker than expected growth in the opening three months of the year, the Chamber has lowered its forecast growth rate for the local economy to 2.8 per cent for the current year from the original 4.8 per cent predicted at its annual Business Summit in December last year.

The new forecast is slightly lower than the Hong Kong SAR Government's full-year forecast of 3 per cent (down from 4 per cent) issued on May 25, but takes into account several developments that suggest the risks to local economic growth are still on the downside.

These include the downward revision to U.S. first quarter growth also disclosed on May 25, slower growth in the East Asian region, including intra-regional trade, and the weaknesses evident in the European economies and Japan.

The Chamber's revised forecast also reflects the further deterioration in the SAR's external trade figures in April, which showed both exports and imports of goods down for the month, and the trade deficit widening last year.

This was not a positive sign for the immediate economic growth outlook, with most of the East Asian region now being affected by slower world trade growth.

As a result, the Chamber expects the current second quarter of the year and the imminent third quarter to show only modest overall economic growth, with some improvement expected in the final three months of the year.

This pattern of economic activity should produce an average real increase in gross domestic product for the year of 2.8 per cent. The Chamber's forecast for consumer price inflation also has been lowered to zero from a positive 1 per cent.

"We are disappointed in having to lower our forecast growth rate for the year and are concerned about the impact that the slower growth in the SAR, in the region and globally will have on Hong Kong," Chamber Chairman Christopher Cheng said when announcing the reduced forecast.

"Unfortunately, the Hong Kong SAR cannot escape the effects of the global economic slowdown in the short term.

"We do, however, have two important factors in our favour," he said. "The first of these is the continued good economic growth on the Mainland and the second is the lowering of interest rates that has occurred so far this year.

"During my visit to the Mainland last week as a member of the government"s mission to the Western regions and Beijing, I was impressed with the economic expansion underway throughout the country and the optimism in the west," he said.

"This good growth nationwide should help underpin Hong Kong's own outlook in the short term, while the developmental prospects in the longer term will provide tremendous opportunities for the SAR in the future.

"As for the cuts in local interest rates so far this year, they are taking time to have an impact on growth, but will ultimately be beneficial to the local economy, especially with some further reductions expected in the coming months.

"In the meantime, we urge the local business community to take a cautious approach in the near term, but to prepare for an improvement in the SAR's economic performance towards the end of this year or in early 2002," he said.

The Chamber made its original 4.8 per cent growth forecast at the beginning of December last year when the prospects for the year ahead seemed more positive, despite some weaknesses locally and in the United States.

The forecast was delivered to the Chamber's annual Business Summit, held on December 13.

The deterioration in levels of economic activity in the U.S., globally and regionally in the early months of this year clearly indicated the original estimate was on the high side, but the Chamber held to its forecast in the belief that interest rate cuts would do their job.

But with the SAR's first quarter growth of 2.5 per cent coming in well below the Chamber's quarterly forecast of 3.2 per cent growth, there was no alternative but to adjust expectations for full year growth downwards.

Ian K Perkin is the Chief Economist of the Chamber.