Hong Kong Maintained Economic Growth In First Quarter

by Mary Swire, Tax-News.com, Hong Kong

30 May 2005

According to the jurisdiction's government, the notable growth momentum of the Hong Kong economy continued into the first quarter of 2005, with GDP growing solidly further by an annualized 6.0% in real terms, following strong 8.1% growth in 2004. On a seasonally adjusted quarter-to-quarter comparison, GDP expanded for the seventh straight quarter, by 1.5% in real terms in the first quarter of 2005.

Externally, merchandise exports held up well for the first quarter as a whole, growing by a further 8.9% in real terms over a year earlier. This was supported by strong trade flows with the mainland and enhanced price competitiveness from the earlier weakness of the US dollar. Exports of services attained further notable growth at 8.6% in the first quarter over a year earlier, as offshore trade continued to surge, while inbound tourism was buoyant.

On the domestic front, consumption demand held firm along with the more entrenched economic recovery, improving labour market conditions and a strong property market. Private consumption expenditure went up further by 4.6% in real terms in the first quarter over a year earlier.

Investment demand recovered after a temporary relapse in the fourth quarter of 2004, underscored by a promising business outlook. Overall investment spending reverted to a 2.2% increase in real terms in the first quarter of 2005, having temporarily suffered a 1.4% drop in the fourth quarter of 2004. Not only that, investment in machinery, equipment and software resumed positive growth in the quarter, and building and construction activities also turned around to a modest increase after nine straight quarters of fall-off.

The labour market improved notably further along with the economic upturn, with total employment rising to an all-time high in the first quarter of 2005. The seasonally adjusted unemployment rate fell to 6.1% in the first quarter and further to a 41-month low of 5.9% in the three months ending April 2005.

While the economy has performed well in the first quarter, the trade outlook is increasingly overshadowed by a number of risks in the external environment. Apart from the sustained high crude oil prices, signs of a regional slow-down have become more evident, leading to a general moderation in their import intake. The Mainland economy, though still having strong growth in the first quarter, may settle back somewhat in growth later in the year, in the light of the government's recent tightening measures to cool down the overheated property market.

Also, if the US dollar continues to strengthen, it would entail a relative loss in Hong Kong's export competitiveness. On top of these, lately the US has taken steps to institute safeguard measures against seven categories of textile imports from China, and there is a risk that the EU will do the same. All these have added uncertainties to Hong Kong's trade outlook. Thus, compared to two months ago, the trade prospect has dimmed somewhat.

Against these, however, there could be some upsides from the domestic sector, not only on account of the current strength of local consumption, but also the latest improvement in construction output, the latter being the laggard and hence the main drag on the economic recovery so far. Furthermore, the opening of the Hong Kong Disneyland later this year should give a boost to inbound tourism and lift consumer sentiments further. Thus, on balance, the broad economic picture remains largely positive, despite a somewhat less upbeat trade outlook.

Against this backdrop and given the robust outturn in the first quarter, the forecast of GDP growth for 2005 is kept unchanged at 4.5-5.5% in real terms, same as the forecast first released in the Budget Speech in March.

Consumer price inflation remained benign. In the first four months of 2005, the year-on-year increase in the Composite Consumer Price Index was 0.4%. While there may be some modest price pressures from the external front stemming from the high oil prices and the earlier weakness of the dollar, local price pressures in overall terms are expected to remain rather mild over the coming few months.

The expansion in supply capacity brought by the hefty capital investment over the past two years should also help alleviate the local price pressures. With the outturn so far broadly in line with the earlier expectations, the forecast rate of change in the Composite CPI for 2005 is thus kept unchanged, at 1.5%.

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