Hong Kong's economy declined by a relatively modest 0.3 per cent in the three months to the end of September, far better than most analysts had expected in the wake of the terrorist attacks on the U.S. on September 11 and their global economic backlash.

However, the government's revision of its annual average growth estimate to zero in its Third Quarter Economic Report, issued November 30, implied a much more dramatic rate of decline in the final three months of the year of some 2.5 per cent.

This means that during the just-ended final quarter of the 2001 calendar year, the local economy would have slipped into recession (technically recognised as two consecutive quarters of negative economic growth), its second within the past four years.

There are some reasons for optimism, however, as it now looks as though the current recession will be relatively short, although quite sharp, with the economy likely to see further negative or little growth in this, the first half the 2002 year.

If the U.S. and global economies respond to the present fiscal and monetary stimuli currently being applied to them, then Hong Kong should see a return to more positive economic growth in the second half of this year.

What the third quarter gross domestic product (GDP) figures did confirm, however, was that the local economy was weakening even before the terrorist attacks on the U.S. and the subsequent launch of the campaign against terrorism, but not as badly as some had expected.

And although the final quarter of the year will show further weakness, the modest 0.3 per cent decline in GDP in the September quarter, together with the slight upward revision of the second quarter number to 0.8 per cent, should be regarded as relatively positive.

It must be noted, however, that helping moderate the negative growth figure in the third quarter were several relatively unusual factors, prime among them the quite substantial increase of 9.4 per cent in machinery and equipment investment, bolstered by imported aircraft investment.

The second unusual factor was the fairly sharp increase in government spending for the quarter and the third the continuing good, though weaker, performance of services trade, with services exports continuing to grow at 1.5 per cent and imports actually declining 2 per cent.

Private consumption spending was modestly positive and will likely continue to weaken in the final quarter of the year and merchandise trade continued to decline, as it is expected to in the closing three months of the year.

Commenting on the outcome, the government economist, K Y Tang, said the economy had continued to slow as a result of the more difficult external environment and domestic sentiment being hit by the further weakening in asset markets and rising unemployment.

He pointed out that externally, total exports of goods showed a bigger 4 per cent decline in real terms in the third quarter, while exports of services also showed slower growth, at 1.5 per cent in real terms for the quarter.

Consumer spending in Hong Kong also weakened and growth in this GDP component was only 1.3 per cent. However, investment spending picked up to 3.7 per cent growth, as the intake of aircraft bolstered machinery and equipment acquisition, even though building and construction output remained sluggish.

He said that externally, exports of both goods and services were likely to slacken further, amidst the austere external environment and, locally, consumer spending would remain moderate, as employment conditions continue to worsen thereby impinging on income and job security.

Investment spending would also be restrained in the final quarter.

Reacting to figures, the Financial Secretary, Antony Leung, said the revision of the annual growth rate from a positive 1 per cent to zero reflected the economic slowdown in the U.S. and Europe, as well as in the surrounding Asian economies, such as Singapore and Taiwan.

"The Mainland economy will continue to grow at a fairly fast rate and Hong Kong, being the major gateway to China, will stand to benefit, so I hope that our citizens would not be too pessimistic about the medium to long-term future of Hong Kong.

"As to the question of when exactly the Hong Kong economy is going to rebound, it is rather difficult to say because a lot depends on the external economies.