Hong Kong's economy grew by a real 12.5 per cent in the opening six months of this year, marking its best first-half performance in 13 years, its most rapid start to any year since the opening months of 1987.

On both occasions the economy was emerging from an economic downturn, although this year's rebound has come off a far worse recession, with gross domestic product (GDP) actually declining in the first half of 1998, whereas back in the 1980s it remained positive throughout.

There are also other differences. Back in the mid-1980s, the recovery was far more broadly based, with the property and construction sector, in particular, playing a positive role in the upturn.

This time around, investment in property and construction has yet to recover.

The mid-1980s recovery was also achieved in the context of continuing inflation, whereas this year's rebound has occurred in a deflationary environment, with the property sector playing a key role in maintaining the general decline in prices.

In the first half of the current year, real GDP may have been up 12.5 per cent in real terms, but nominal, or current dollar value GDP (effectively the cash flow of the domestic economy) rose on 4.4 per cent. Deflation averaged 7.2 per cent.

This contrasts sharply with the experience in the first half on 1987 when the economy grew by 12.9 per cent in real terms and a massive 22.4 per cent in nominal terms. Inflation, as measured by the GDP deflator, was then running a 8.5 per cent.

But there are also similarities between the two recoveries as well. External trade, especially buoyant re-export trade with the Mainland, played a key role in the 1987 recovery and it has been one of the key drivers of growth in the present rebound.

Back in the mid-1980s, the local economy was also going through a dramatic structural change as manufacturing industry switched its activities across the border into China and made room for the rise in the services sector.

This structural change helps explain the high level of new investment, including property and construction, in the mid-1980s recovery. It also explains the powerful boost the economy received from re-exports by the new industries across the border.

In the current recovery, the structural change is of a different order altogether, with the Hong Kong SAR adopting the tools of the new economy in the expansion of computer-based information technology and electronic commerce.

This, in turn, helps explain the tremendous growth in investment in machinery and equipment in the current recovery, with 5 per cent growth in total new investment in the first half, despite the decline in the property and construction sector.

The increase in new investment was totally accounted for by a massive 24 per cent jump in machinery and equipment compared with a 12 per cent decline in building and construction, and similar declines in other property related investment.

As the government said in its half yearly economic report: "There was a particularly large intake of office equipment, and also capital items related to information technology."

The investment trend was also reflected in the retained imports of capital goods, which soared by 43 per cent in real terms over the first half of last year.

"The rebound was broadly spread, yet with retained imports of office equipment, comprising mainly computer equipment, recording a particularly sharp growth of 140 per cent in real terms in the first half of 2000 over a year earlier," the report said.

It can therefore be seen that another restructuring of the local economy and the emergence of the so-called "new economy" has played a role in the Hong Kong SAR's rebound from recession in the past nine months.

But there are still question marks over how long this recovery can continue, whether the investment in the "new economy" will be maintained and, if not, whether the property and construction sector can take up some of the slack?

Externally, too, there have to be worries about where the U.S. economy is headed, especially as it moves beyond election mode and into 2001. Will there be a marked slowdown in the U.S. and, if not, will there be a need for higher interest rates?

How long will the current rise in world crude oil prices last and, if they are maintained for some time, what impact will they have on world trade, global economic growth and underlying inflation? Will Asia, in particular, be hit by higher crude prices?

These are all questions that will come to the forefront in the near-term future. In the meantime it is clear that the local economy has performed well in coming out of the Asian crisis-induced recession of 1997-1999, although there are some cracks.

At 10.8 per cent in the second quarter, Hong Kong's growth in real GDP was close to the top end of the range of forecasts and, together with first quarter growth of 14.3 per cent, gave the strong start to the year.

There were, however, worrying signs in the 0.8 per cent decline in real GDP quarter-on-quarter, nominal (current dollar) growth of just 2.6 per cent compared with last year and continuing deflation, with the GDP deflator down 7.4 per cent.

The importance of deflation in the overall outcome cannot be dismissed, effectively making the GDP deflator a GDP inflator for the first half of the year.

The government's upgrading of its annual growth forecast to 8.5 per cent (from 6.3 per cent) comes as no surprise in such circumstances, but also implies a slowing of growth to around 5 per cent in the current closing six months of the year.

It will be interesting to see the psychological impact on the community of this dramatic difference in outcomes for the two halves of the year, especially if it leaves the impression that the economy is slowing going into 2001.