Forecast GDP growth for 2007 as a whole has been revised to 5%-6% from 4.5%-5.5%, while the forecast consumer price inflation rate stayed at 1.5%.

Government Economist Kwok Kwok-chuen told reporters on Friday that the upward revision has taken into account the better-than-expected outturn of a 6.3% GDP growth in the first half of 2007, and also the range of uncertainties prevailing in the external environment.

He stated that, barring any abrupt adverse changes in the external environment, the economy is set for further solid growth in the second half of the year.

As to the inflation outlook, Mr Kwok said higher food prices, renminbi appreciation and the recent weakness of the US dollar will continue to exert cost pressure from the external front. Nevertheless, the sustained rapid rise in labour productivity and continued expansion in productive capacity on the supply side will provide an offset, he suggested. Moreover, various one-off factors including the rates concession for two quarters, the recent public housing rental cut, and the implementation of the Pre-primary Education Voucher Scheme, will also help to keep the headline inflation at a moderate level for the rest of the year.

"With the actual outturn of consumer price inflation so far largely in line with expectations - 1.5% for the first half of 2007 - the forecast rate of increase in the Composite Consumer Price Index for 2007 as a whole is maintained at 1.5%," Mr Kwok said.

Reviewing the city's economic situation in the second quarter, Acting Principal Economist Andrew Au revealed that merchandise exports grew 11.3% in real terms. While exports to the Mainland stayed vibrant on the back of a buoyant economy, those to the European Union and Japan showed faster growth, thereby offsetting the softness of the US market. Further weakening of the US dollar also helped.

Financial services recorded a spectacular performance, while many business and professional services also held up well. Exports of services continued to show distinct growth, rising 10.9% in real terms, underpinned by the surge in offshore trade, buoyant financial market activities, and sustained expansion of inbound tourism.

Domestically, private consumption expenditure rose 6.6% in real terms in the second quarter, supported by rising income, better job prospects and improved financial positions of households. Overall investment spending picked up to a strong 11.1% growth in real terms. Investment in equipment and machinery re-accelerated to double-digit growth amid strong business confidence, while construction and building activity saw a notable rebound, albeit from a low base.

The labour market improved in the second quarter, with the seasonally adjusted jobless rate edging down to 4.2%, the lowest since mid-1998. Wages and earnings continued to rise, while job vacancies surged to a post-1997 high in March. Looking ahead, Mr Kwok observed that the global economic environment is still largely positive.

"However, the weakness of the US economy arising from a prolonged correction in the housing market and the turmoil arising from the subprime mortgages will remain a concern. This, coupled with the tightening in credit conditions in many financial markets, will constitute the key source of uncertainty going forward."

"The external environment will also be affected by the movements of exchange rates as well as the macroeconomic adjustment measures in the Mainland. Yet there are also a number of favourable developments, including the continued vibrant growth of the Mainland and other emerging economies, the sustained economic expansion in Europe and Japan, as well as the fairly strong performance of other Asian economies," he added.

Noting that domestic demand has gathered strong momentum in recent quarters, Mr Kwok stated that it assumes an important role in driving the economy forward. An improving labour market and strong consumer confidence should continue to support private consumption spending.

"Investment spending should also hold up well, in the face of the brisk pace of business expansion, sustained corporate profit growth, and new business opportunities emanating from the economic integration between Hong Kong and the Mainland," he concluded.