The growth momentum of Hong Kong's economy is likely to lose steam, as exports and consumption will weaken amid less favorable external and domestic economic environment. The growth of exports is set to decline as a mix of monetary tightening, rising oil prices and plunging stock prices will slow the growth of major overseas markets and ease the demand for Hong Kong's products. The strong rebound of private consumption in the first half thanks to the recovery of consumer confidence is also unlikely to continue given that consumer purchasing power will be restrained by subdued pay rise. Consumer spending could be further dampened by the negative wealth effect resulting from the bursting of the tech stock bubble in recent months. All in all, real GDP growth is likely to slow from 9% this year to 4.2% in 2001. Despite the slower pace of growth, continued economic recovery would ease deflation from 4% in 1999 to 3.6% in 2000, and turn it into a mild inflation of 0.5% in 2001.

After a strong rebound to 12.5% in the first half of the year, the growth momentum of Hong Kong's economy is beginning to lose steam.  Exports and consumption, the two main engines which propelled the expansion of the economy in the first half, have both been easing in recent months due to less favorable external and domestic economic environment.

Externally, the US economy has shown signs of weakening as consumption has eased after the 175 basis points interest rate hike between June 1999 and May 2000.  The growth of consumption could further be dragged by the 39% plunge of NASDAQ Composite Index between March and October this year, which has hit consumer confidence.  Meanwhile, the surge of oil prices to ten-year highs will also weaken the purchasing power of consumers as they cut spending to pay for higher energy prices.  As the US directly accounted for 24% of Hong Kong's exports and a large part of local trade with the mainland China is also related to the US market, the slowdown of US consumption would inevitably hit local exports.  Export growth would decline more rapidly in 2001 when the European economies also begin to weaken under higher interest rates.  To contain inflation pressure due to the weakening Euro and higher oil prices, the European Central Bank is expected to raise its repo rate by 75 basis points to 5.5% in the next twelve months.  Continued recovery of Asian economies, particularly China and Japan, will, however, help to partly offset the impact of weakening US and European economies on local exports.

Domestically, the strong rebound of private consumption in the first half thanks to the recovery of consumer confidence is unlikely to continue given that consumer purchasing power will be restrained by the salary freeze this year and subdued pay rise next year.  Meantime, the negative wealth effect brought about by the bursting of the tech stock bubble in recent months could put a further drag on consumer spending.  However, the risk that domestic demand would be hit by further surge in US interest rates has diminished.  Given the weakening US economy and the absence of a sharp rise in underlying inflationary pressure despite higher oil prices, the Federal Reserve is likely to keep interest rates steady in the next twelve months.

As a result of moderating external and domestic demand, Hong Kong's real GDP growth is likely to slow to 5.9% in the second half, bringing full year growth for 2000 to 9%.  In 2001, the pace of economic growth is projected to decline further to a more sustainable rate of 4.2%.  Continued economic recovery will help to ease deflation in Hong Kong, as retailers will be 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 and transportation costs have increased due to soaring international oil prices.  All in all, deflation is forecast to ease from 4% in 1999 to 3.6% in 2000, and would turn into a mild inflation in the first half of 2001.

As the local corporate sector continues to replenish inventories and bring in more imported machinery and equipment to support public infrastructure projects, imports will continue to rise more rapidly than exports.  Despite the faster growth of imports, Hong Kong's current account surplus would remain healthy at US$ 8.6 billion and US$ 4.4 billion in 2000 and 2001 respectively due to steady increase in the exports of services.  Supported by continued current account surplus, Hong Kong's foreign exchange reserves would edge up to near US$ 110 billion by the end of 2001.
 

Jason Kwok
North Asia Chief Economist

Joe Lo
Senior Economist

Ellen Cheuk
Economist

Alice Chan
Senior Information Officer