Back in the dark recesses of history, before war, pneumonia and face masks, Hong Kong's economy was beginning to show signs of life, growing faster each quarter for 15 months running. The improvements were in both nominal and real terms, and -- before "atypical economics" emerged -- pointing to an end to deflation. Sadly, that is looking less and less likely this year.

The first two months of 2003 were solid performers, particularly on the trade front where two-way commerce grew nearly 20 percent over January-February 2002. As a trade and financial services oriented economy, the foundations looked good. But, loss of consumer confidence, visitors staying away in droves, delays in moving goods and passengers through our port and unpredictable shifts in retail sales will all take their toll.

As the most international city in the world, we are at the mercy of forces beyond our control. From the Asian Financial Crisis to the dot.com bubble, September 11, war in the Middle East and now a pneumonia epidemic, our resilience has been tested. With luck, the current challenges will prove short-lived.

Hong Kong's gross domestic product (GDP) rose 2.3 percent in real terms last year, nearly four times the 0.6 percent rise recorded in 2001. However, all of the rise -- and then some -- was due to deflation. Positive nominal growth of 0.6 percent in the second half simply wasn't enough to overcome the 2 percent drop in January-June. The chart on the right shows growth in nominal and real GDP.

The economy contracted 0.7 percent in nominal terms last year, the fifth decline in seven years. Since 1997 -- notable for the on-set of the Asian financial crisis in this analysis, not the handover -- the economy has cumulatively lost 4 percent of its value. Yet, the mix of what's up and what's down tells a different story. Since 1997, consumer spending has dropped 11.3 percent, but government consumption spending (largely salaries) is up 15.5 percent. Services exports rose 20.8 percent over five years, but capital investment fell by 31.7 percent. The second chart shows the difference, over five years, in price changes for the private and public consumption.

The trend continues. While private consumption and capital investment both fell back into the red in real terms (dropping 1.3 percent and 5.2 percent, respectively) in 2002, government spending (up 3 percent), exports (up 8.8 percent) and imports (up 6.4 percent) combined to keep real GDP on the rise.

Fourth quarter growth of 5 percent, over October-December 2001, was the strongest in two years. Most notable was a 0.5 percent rise in investment, the first since the third quarter of 2001. Excluding changes in inventories, GDP expanded for the 14th straight quarter, at a 3 percent pace.

In nominal terms, GDP contracted 0.7 percent, the fourth drop in five years. Private consumption expenditure, equal to 61.9 percent of domestic demand, fell 5 percent during the year, the sharpest fall on record. October-December's 5.9 percent decline in domestic demand was the worst in four years, reflecting the continued lack of consumer confidence amid steady deflation.

Two-way trade, which is 3.2 times as large as domestic demand, rose 4.5 percent in nominal terms during 2002, backed by a 6 percent rise in goods and services exports (up 5.4 percent and 8.8 percent, respectively) and a 3 percent rise in overall imports. Merchandise imports expanded 3.4 percent during the year while services bought from abroad contracted 0.5 percent.

Prices, as measured by various deflators derived from the national accounts, continued to fall. The GDP deflator fell 2.9 percent for the full year, with the fourth quarter's disappointing 3.8 percent drop the worst in nine quarters and the 18th straight drop. Despite a long-awaited contraction in the government consumption expenditure (GVT) deflator -- a proxy for the size and cost of the bloated civil service -- which fell 2.6 percent in the final quarter of the year, the GVT price indicator rose 0.2 percent last year.

Goods and services export prices fell 2.9 percent last year, but eased to just a 2 percent fall in the fourth quarter. Merchandise imports and exports have fallen in price for 27 straight quarters -- predating the Asian financial crisis -- by more than a year. During that time, import prices fell a cumulative 17 percent while export prices dropped 14 percent.

After taking into account a 0.7 percent rise in the population, GDP per capita totaled HK$187,571 (US$24,048) last year. That is about on par with the United Kingdom and higher than the average among Euro-zone nations, at least prior to the fall in the US dollar in recent months.