HK Government Comments On Q1 Economic Situation

by Mary Swire, for LawAndTax-News.com, Hong Kong

16 May 2008

Hong Kong's Government on Friday released the First Quarter Economic Report 2008, together with the preliminary figures on Gross Domestic Product for the first quarter of 2008.

The Government Economist, Kwok Kwok-chuen, described the economic situation in the first quarter of 2008 and provided the latest GDP and price forecasts for the year.

The report revealed that the Hong Kong economy continued to expand strongly in the first quarter of 2008, despite the growing adversities in the external environment. With real GDP growing by 7.1%, the economy extended the run of distinctly above-trend growth to 18 quarters.

Domestically, both consumer and investor confidence remained strong in the first quarter, thus maintaining domestic demand's key role in supporting overall economic growth. Private consumption expenditure rose markedly further by 7.9% in real terms, underpinned by the firm labour market conditions and rising incomes.

Overall investment held up well, expanding by 8.9% in real terms, with a rebound in building and construction activity. However, amidst dimmer global economic prospects, the local stock market experienced further consolidation in the first quarter and the housing market turned less hectic.

Consumer price inflation picked up further in the first quarter, mostly due to the surge in food prices amidst the global food inflation. The sustained above-trend economic growth also added to inflationary pressure from the demand side.

Headline Composite CPI inflation averaged at 4.6% in the first quarter. After netting out the one-off effects of the rates concession this year and the public housing rental waiver last year, underlying Composite CPI inflation in the first quarter was 4.9%.

Looking ahead, the external environment will remain uncertain and challenging, the report observed. The US economy will continue to be weak with the effects of the housing market downturn spreading into the wider economy, while global financial markets are likely to remain unsettled. Economic activities in other major advanced economies have also showed signs of deceleration.

Nevertheless, the growth momentum in the emerging and developing economies, including the Mainland economy, is expected to remain vibrant, although there should unavoidably be some mild moderation in growth due to the weaker demand from the advanced economies. Yet this should still provide some cushioning effect to the impact of the economic slowdown in the developed world on Hong Kong in the coming quarters.

Overall, given the uncertainties prevailing in the external environment and dimmer global economic prospects, the GDP forecast at 4-5% as announced in the Budget round in February was kept unchanged.

However, the report suggested that with the strong GDP growth in the first quarter, and barring any abrupt external shocks, it is likely that GDP growth in 2008 should be close to the upper end of the range forecast.

The inflation outlook is likewise rather uncertain and will hinge much on the movements of food prices in the international markets in the rest of the year, which can be expected to be volatile. Apart from global food prices, the elevated international oil prices, the exchange rate movements, as well as the strength of the local economy are likely to continue to exert inflationary pressure.

The Government concluded by announcing that it will review the inflation forecast as more incoming data become available.

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