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1 August, 2000 Hong Kong Economic Forecasts |
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After having expanded by an estimated 13% in the first half of 2000, Hong Kong is likely to show more modest growth due to weaker exports and higher interest rates. Externally, an expected weakening of US and European economies due to rising interest rates would hit local exports. Domestically, rising interest rates would put a drag on the growth of domestic demand. The impact of interest rate hike on consumption should, however, be moderate thanks to a mortgage price war among banks which has limited the increase in mortgage rate. The government's recent measures to stabilize the housing market would also help to lift market sentiment and offset the impact of interest rate hike on property investment. As a result, real GDP growth should remain strong at 8.8% for 2000, the fastest since 1987. In 2001, the pace of economic growth is projected to slow further to a more sustainable rate of 4.2%.
| 1998 | 1999e | 2000f | 2001f | |
| Real GDP growth (%) | -5.1 | 2.9 | 8.8 | 4.2 |
| Inflation (%) | 2.8 | -4.0 | -3.6 | 0.5 |
| Unemployment rate (yearly average, %) | 4.7 | 6.1 | 5.0 | 4.0 |
| Budget balance (% of GDP) | -1.8 | -0.1 | -0.5 | 0.1 |
| Money supply growth (HK$ M2, %) | 9.8 | 5.3 | 2.5 | 7.1 |
| Prime rate (year-end, %) | 9.0 | 8.5 | 10.0 | 9.5 |
| Trade balance (US$ billion) | -10.5 | -5.6 | -11.8 | -17.0 |
| Foreign exchange reserves (US$ billion) | 89.6 | 96.3 | 102.6 | 109.1 |
| HK$/US$ (year-end) | 7.746 | 7.773 | 7.800 | 7.800 |
Economic Outlook
Fueled by robust export growth and recovery of private consumption, Hong Kong's economy is likely to have rebounded strongly by 13% in the first half of 2000. Looking ahead, the growth momentum is likely to lose steam due to weaker exports and higher interest rates.
Externally, US and European economies are expected to slow. To contain inflation risk, the US Federal Reserve is expected to raise its Federal Funds target rate by a further half percentage point by year-end after the 175 basis points hike since June 1999. With rising interest rates, US economic growth would decline in the coming months and the slowdown is likely to extend into 2001. As the US directly accounted for 24% of Hong Kong's exports and a large part of Hong Kong's trade with the mainland China is also related to the US market, a US economic slowdown would inevitably hit local exports. Export growth would decline further in 2001 when the European economies also begin to weaken due to higher interest rates. Continued Asian economic recovery will, however, help to partly offset the impact of weakening US and European economies on exports.
Domestically, rising interest rates would put a drag on the growth of consumer spending and private investment. After having risen by one percentage point between February and May this year, local prime rate is likely to follow its US counterpart and edge up by another half percentage point to 10% by year-end. The impact of interest rate hike on domestic demand should, however, be moderate thanks to the lower indebtedness of local corporations and households. Moreover, the mortgage price war among banks since mid-1999 has limited the increase in mortgage rate and capped the rise in the debt service burden of homeowners. Meanwhile, measures taken by the government in June to stabilize the housing market, which include the reduction in the sale of public housing by 12,000 units this year and the abandonment of the 85,000 annual housing supply target, would also help lift market sentiment and offset the impact of interest rate hike on property investment.
As a result, Hong Kong's real GDP growth is likely to remain steady at 5.3% in the second half, bringing full year growth for 2000 to 8.8%, the fastest since 1987. In 2001, the pace of economic growth is projected to slow further to a more sustainable rate of 4.2%. Continued economic recovery will help to ease deflation in Hong Kong. Thanks to the recovery of private consumption, retailers are under less pressure to cut prices. Recent government's measures to stabilize the housing market would also lend support to residential property prices and ease the decline of housing rentals. Meanwhile, fuel prices have increased due to soaring international oil prices. All in all, deflation is forecast to decline from 4% in 1999 to 3.6% in 2000, and would turn into a mild inflation in the first half of 2001.
As the corporate sector continues to replenish inventories and construction companies bring in more imported machinery and equipment to support various public infrastructure projects, imports are expected to rise more rapidly. Despite the faster growth of imports, Hong Kong's current account surplus would remain healthy at US$ 6.8 billion and US$ 2.8 billion in 2000 and 2001 respectively due to steady increase in the exports of services. Continued current account surplus will help to boost Hong Kong's foreign exchange reserves to over US$ 100 billion by the end of 2000.
Hong Kong Major Economic Forecasts
| 1994 | 1995 | 1996 | 1997 | 1998 | 1999 | 2000f | 2001f | ||
| National Account: | |||||||||
| Gross domestic product (GDP) | US$bn | 130.8 | 139.2 | 154.1 | 171.0 | 163.6 | 158.8 | 165.7 | 172.9 |
| HK$bn | 1,010.9 | 1,077.1 | 1,191.9 | 1,323.9 | 1,266.8 | 1,232.2 | 1,291.2 | 1,348.4 | |
| Real GDP growth | % | 5.4 | 3.9 | 4.5 | 5.0 | -5.1 | 3.0 | 8.8 | 4.2 |
| Population (year end) | million | 6.12 | 6.27 | 6.42 | 6.62 | 6.81 | 6.97 | 7.15 | 7.33 |
| Per capita GDP | US$ | 21,674 | 22,618 | 24,419 | 26,325 | 24,482 | 23,213 | 23,621 | 24,035 |
| Gross domestic investment | % of GDP | 31.9 | 34.8 | 32.1 | 34.5 | 29.7 | 25.4 | 28.3 | 29.8 |
| Gross domestic savings | % of GDP | 33.1 | 30.5 | 30.7 | 31.1 | 30.2 | 29.9 | 30.9 | 30.1 |
| Resource gap | % of GDP | 1.2 | -4.3 | -1.4 | -3.4 | 0.5 | 4.6 | 2.6 | 0.3 |
| Inflation rate1 | % | 8.1 | 8.7 | 6.3 | 5.9 | 2.8 | -4.0 | -3.6 | 0.5 |
| Unemployment rate (yearly average) | % | 1.9 | 3.2 | 2.8 | 2.2 | 4.7 | 6.1 | 5.0 | 4.0 |
| Budget surplus/deficit (fiscal year) | % of GDP | 1.1 | -0.3 | 2.2 | 6.6 | -1.8 | 0.8 | -0.5 | 0.1 |
| Fiscal reserves (year ended March 31)2 | US$bn | 18.1 | 19.5 | 19.1 | 22.4 | 59.1 | 56.0 | 57.0 | 56.2 |
| Public debt3 | US$bn | 8.9 | 9.3 | 14.0 | 15.2 | 14.7 | 15.2 | 15.3 | 15.5 |
| Foreign Trade: | |||||||||
| Merchandise exports | US$bn | 151.4 | 173.7 | 180.7 | 188.1 | 174.0 | 174.1 | 199.6 | 211.7 |
| % change | 11.9 | 14.8 | 4.0 | 4.0 | -7.5 | 0.1 | 14.6 | 6.1 | |
| Merchandise imports | US$bn | 161.8 | 192.8 | 198.5 | 208.6 | 184.5 | 179.7 | 211.3 | 228.7 |
| % change | 16.7 | 19.1 | 3.0 | 5.1 | -11.6 | -2.6 | 17.6 | 8.2 | |
| Trade balance | US$bn | -10.4 | -19.0 | -17.8 | -20.6 | -10.5 | -5.6 | -11.8 | -17.0 |
| Balance of Payments: | |||||||||
| Exports of goods & services | US$bn | 182.5 | 208.1 | 219.0 | 230.0 | 209.5 | 209.6 | 239.1 | 254.0 |
| % change | 11.9 | 14.0 | 5.3 | 5.0 | -8.9 | 0.0 | 14.1 | 6.2 | |
| Imports of goods & services | US$bn | 181.0 | 214.1 | 221.2 | 235.9 | 208.7 | 202.4 | 233.9 | 252.5 |
| % change | 16.8 | 18.3 | 3.3 | 6.6 | -11.5 | -3.0 | 15.6 | 7.9 | |
| Current account balance4 | US$bn | 1.6 | -6.1 | -2.2 | -6.2 | 2.9 | 9.2 | 6.8 | 2.8 |
| % of GDP | 1.2 | -4.3 | -1.4 | -3.6 | 1.8 | 5.8 | 4.1 | 1.6 | |
| Foreign exchange reserves5 (ratio to currency in circulation) |
US$bn | 49.3 | 55.4 | 63.8 | 92.8 | 89.6 | 96.3 | 102.6 | 109.1 |
| % | 487.9 | 524.7 | 566.9 | 775.7 | 750.3 | 602.6 | 703.0 | 743.4 | |
| Import coverage6 | months | 9.9 | 9.1 | 10.9 | 14.6 | 17.1 | 20.7 | 18.0 | 17.0 |
| Money Supply Growth: | |||||||||
| Currency in circulation | % change | 7.0 | 5.2 | 7.3 | 5.3 | 0.7 | 22.6 | -4.5 | 0.5 |
| M1 (local currency) | % change | -0.3 | 2.2 | 15.5 | -5.1 | -5.2 | 15.2 | -1.4 | 4.0 |
| M1 (inc. foreign currency) | % change | -1.2 | 2.8 | 14.2 | -4.3 | -5.0 | 13.9 | 1.1 | 4.1 |
| M2 (local currency)7 | % change | 18.7 | 15.1 | 19.3 | 9.9 | 9.8 | 5.3 | 2.5 | 7.1 |
| M2 (inc. foreign currency) | % change | 12.9 | 14.6 | 10.9 | 8.3 | 11.8 | 8.1 | 7.8 | 8.0 |
| Year-end short-term interest rate (HIBOR 3-month) | p.a. % | 6.31 | 5.88 | 5.50 | 9.25 | 5.38 | 5.88 | 7.1 | 6.60 |
| Year-end long-term interest rate (2-year Exchange Fund notes) | p.a. % | 7.74 | 5.54 | 5.58 | 8.75 | 5.96 | 6.37 | 6.85 | 6.35 |
| Prime interest rate (year-end) | p.a. % | 8.50 | 8.75 | 8.50 | 9.50 | 9.00 | 8.50 | 10.00 | 9.50 |
| Exchange rate (year-end) (year-average) |
HK$/US$ | 7.738 | 7.732 | 7.736 | 7.746 | 7.746 | 7.773 | 7.800 | 7.800 |
| HK$/US$ | 7.728 | 7.736 | 7.734 | 7.742 | 7.745 | 7.758 | 7.793 | 7.800 | |
| Notes: | 1 - Figures from 1996 onwards are based on Composite Consumer Price Index, while those before 1996 are based on Consumer Price Index (A). |
| 2 - The SAR Land Fund has been transferred to the Government after July 1, 1997. As a result, the fiscal reserves after the fiscal year 1996/97 include the SAR Land Fund. | |
| 3 - Includes the Exchange Fund bills and notes, and debts of the MTRC that are guaranteed by the Government. | |
| 4 - Balance of trade in goods and services before 1997. | |
| 5 - The surge in foreign exchange reserves in 1997 is due to the injection of SAR Land Fund into fiscal reserves, which are a major part of foreign exchange reserves. | |
| 6 - Equals to foreign exchange reserves divided by average monthly imports of goods retained for local use. Imports retained for local use equal imports less re-exports (adjusted for re-export margins). | |
| 7 -Adjusted to include swap deposits. |
Jason Kwok
North Asia Chief Economist
Joe Lo
Senior Economist
Ellen Cheuk
Economist
Alice Chan
Senior Information Officer
Tel:(852) 2868-8443
