The economic data to date confirm that Hong Kong is following the rest of the region, and the major OECD economies through a slow point in the world economy. All around East Asia activity has slowed: every economy, except Japan, Thailand and China, reported slower growth in the first quarter than in the final months of 2002. The second quarter was pretty ugly, and prospects for a quick rebound from consumers isn't good. The U.S. Federal Reserve Board described the economy as "sluggish" in April and May, while Japan's revised GDP figures for the first three months of the year showed less robust activity than previously thought.

The only bright spot was trade: over four months, China accounted for more than half of the 15.2 percent increase in Hong Kong's global two-way trade. Re-exports rose 17.8 percent, again driven by China (up 29.2 percent) and to a lesser extent, Japan (up 14 percent). Imports rose 15.2 percent from January-April 2002, also led by China (up 12.7 percent) and Japan (up 23.8 percent).

China trade is far more than just a bright spot. In the first five months of the year, the Mainland's two-way trade with the world rose 39.6 percent over January-May 2002, a pace that will go a long way toward easing our plight. The graph shows the close correlation between growth in Hong Kong's two-way trade and in that of China, and until recently, the knock-on effect to Hong Kong's domestic demand.

The outlook for demand elsewhere, however, is more likely to deteriorate than to improve quickly. Japan revised downward growth in real imports in the first quarter, from an initial 9.2 percent year-on-year expansion to just 7.4 percent. Much of that modification stemmed from the elimination of all growth in capital investment, from a 2.3 percent rise to a mere 0.07 percent blip. Both measures of economic activity -- imports and investment -- are drivers of economic output across East Asia.

But it is in the local economy that the clouds are darkest, and will only slowly clear. Domestic demand remains in the doldrums -- as it has for the past 18 months -- as residents stayed away from shops and restaurants in droves, and tourists simply stayed away. Private consumption, down 2.1 percent in the January-March period from a year earlier, deteriorated from the previous two quarters. In nominal terms, the HK$270 billion first quarter domestic economy is exactly the same size as in the second quarter of 1995, eight years ago, and more than 24 percent smaller than at the 4th quarter 1997 peak.

SARS and the consequent collapse in tourism hit the local economy very hard. Retail sales in the first quarter were off 2.6 percent from a year earlier, and then fell 15.2 percent in April. We are now back to 1992 shopping levels in dollar terms, and 1993 prices. Even before the worst of SARS, business receipts at hotels and airlines were already off more than 22 percent in January-March, from the same 2002 period.

April numbers give us a good guess at how bad May might have been, and with early signs for June, a view on the second quarter. Aside from restaurants, entertainment and tourist spending -- which are not separated from the retail figures -- the largest declines in the month were in the clothing, shoes and durable goods categories, comprising nearly 40 percent of the total drop in sales. The jewellery, watches, clocks and valuable gifts category accounted for 23 percent of the slump. Neither is likely to have done any better in May, but recovery in June is expected.

The first quarter's rapid, 4.7 percent drop in prices (as measured by the GDP deflator), was the quickest decline since mid-2000 and the 19th straight drop in a row. Deflation has worsened each quarter in the past year, and deep price cutting in the April-June quarter suggests the end is not yet in sight.

The good news is that various governments and health organisations are recognising that SARS is not a threat to travellers to Hong Kong, given the city's new-found attention to hygiene. Visitors from Guangdong are returning, and the lifting of the U.S. State Department's travel restrictions on government employees further confirms that the worst is (touch wood) over. At this writing, news of completion of the SAR's discussions with Mainland authorities over the Closer Economic Partnership Arrangement (CEPA) is still pending, but the announcement in late June is expected to give a boost to business, investment and morale.