Hong Kong's economy is showing strong signs that the bottom of the business cycle is either just past or just about to pass. The evidence is strongest in three areas: retail sales, price deflation and employment. Let's look at each in turn.

Retail sales in Hong Kong dipped less than HK$400 million in October and November, from a year earlier, the smallest declines in quite a while (the average for the previous six months was nearly double: HK$787 million a month). Clearly, the numbers are heading in the right direction.

In volume terms, the October-November figures also looked less bad, falling only about half as much as in April-September. The specific components of the retail sector paint a different picture. Fuel was off 15 per cent in volume in November, jewelry and similar items 12.1 per cent, apparel 9.5 per cent and furniture and fixtures 8.9 per cent. Increases were evident in motor vehicles and parts (up 21.4 per cent), also in volume terms -- the fifth straight month of increase -- and electrical and photographic merchandise 7.2 per cent. This suggests the luxury market is healthy, and the declines are primarily in commodities. This is confirmed by the discrepancy between rising sales at supermarket outlets in department stores (up 1.5 per cent in November and 1.2 per cent over 11 months) and the more modest 0.3 per cent rise (0.9 per cent in January-November), in direct supermarket purchases.

As for prices, 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, and probably about the same (perhaps a hair less) in December. That would give us an average decline of 3.2 per cent for the year.

Utilities (gas, water and electricity) fell in price the furthest last year -- over 7 per cent -- followed by durable goods and housing. The price of alcohol and tobacco products actually rose by nearly 2.5 per cent, and clothing and footwear by about 0.8 per cent.

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 minus -3 = +5).

The full-year Composite CPI deflation, while not strictly comparable to the broader GDP deflator, is one of the early signs for higher-than-anticipated real GDP growth in the fourth quarter.

What is important to remember, however, is that lower real GDP figures for the fourth quarter might be a positive signal, a signal that Hong Kong's deflation is easing.

As price deflation eases and the economy expands faster, more jobs will be created. However, employment is a lagging indicator: companies tend to hire only when they have more work than hands to do it, and then only when that work is predictably stable over the foreseeable future.

We probably added about 33,000 jobs in the fourth quarter of 2002, and now have more employment in Hong Kong than at any time in history. We also have more people looking for jobs, because of strong growth in the labor pool, and that is what gives us over 7 per cent unemployment.

The improvement in underemployment -- people who cannot find enough work -- puts an even finer point on the turnaround. Subtracting underemployment from total employment gives what might (for lack of a better term) be called "complete employment." This figure rose 0.8 per cent year-on-year, the first improvement in 13 months.