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17 April, 2001 Hong Kong Economic Forecasts |
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Second Quarter, 2001 Highlights After a robust 10.5% expansion in 2000, Hong Kong's economy is expected to grow much slowly this year. Externally, with a more pronounced US economic downturn, Hong Kong's export growth would slow from 16.2% in 2000 to only 4% this year. Domestically, while the cut in the prime rate by 150 basis points so far this year would increase the disposable income of mortgage homeowners, the impact on consumption would be overshadowed by the weakening of consumer confidence due to falling stock and property prices. Meanwhile, with housing demand hit by waning confidence of homebuyers, private property developers would also hold off their construction projects, which would put a drag on investment spending. As both exports and domestic spending are likely to weaken this year, real GDP growth is projected to slow to only 1.8% in 2001. With weaker domestic demand, deflation is also expected to persist and would average about 0.6% in 2001, compared to 3.7% in 2000.
ECONOMIC OUTLOOK After a robust 10.5% expansion in 2000, Hong Kong's economy is expected to grow much slowly this year. Externally, latest statistics showed that the US economic downturn would likely be more pronounced than expected. Hit by the negative wealth effect of plunging stock prices, US consumers are cutting spending. With weakened demand, US companies are also investing less. US economic growth is, therefore, expected to slow from 5% in 2000 to only 1.6% this year despite the Federal Reserve's aggressive interest rate cut. With the US market accounted for a significant 23% of Hong Kong's exports and indirectly supported a large part of the local trade flows with China, Hong Kong's export growth is expected to slow from 16.2% in 2000 to only 4% this year. Domestically, while the cut in the prime rate by 150 basis points so far this year would increase the disposable income of mortgage homeowners, the impact on consumption would be overshadowed by falling asset prices. As a result of tumbling US stock prices and disappointing corporate results, the Hang Seng Index fell by 25% over the past two months to its lowest level in two years in early April. Against the stock market slump, the government's property-stimulus measures announced in February have failed to prop up home prices. Following a short-lived rebound early this year, housing prices have fallen again towards the end of the first quarter. With consumer confidence hit by the negative wealth effect of falling asset prices, retail sales are likely to remain depressed. The outlook on investment is also mixed. Although the lowering of funding cost thanks to falling local interest rates would support a steady growth of spending on machinery and equipment, overall investment is likely to pick up only modestly due to sluggish housing construction. With housing demand hit by waning confidence of homebuyers, private property developers would likely hold off their housing projects to avoid piling up large inventory of unsold residential units. Meanwhile, the government has also scaled down the construction of subsidized flats hoping to ease the supply glut in the housing market. The sharp depreciation of the Japanese yen, which plunged by 10% since February to a 30-month low of 126.67/US$ in early April, may put another drag on domestic demand. On concerns over the yen's weakness, investors have generally demanded a higher risk premium on holding all Asian currencies, including the HK dollar. As a result of this, local interbank interest rates have shown signs of firming up during recent trading, even though their US counterparts have continued to edge downward. If the trend persisted, Hong Kong may not be able to benefit fully from the further interest rate cuts in the US. To avert a prolonged economic downturn in the US, the Federal Reserve is expected to lower the Federal Funds target rate by another 75 basis points in the coming months. As both exports and domestic spending are likely to weaken this year, real GDP growth is projected to slow to only 1.8% in 2001. Against the more bearish economic outlook, unemployment rate would remain high at the current level of around 4.4% for most of this year. Meanwhile, with weaker domestic demand, deflation is also expected to persist and would average about 0.6% in 2001, compared to 3.7% in 2000. The outlook in 2002 will depend on the timing of the US economic recovery. Under the baseline scenario which assumes the US economy would slowly turn around towards the end of this year, the pace of Hong Kong's economic growth could edge up to 4% in 2002, propelled mainly by a recovery of exports.  CITIBANK, N. A. Jason Kwok Joe Lo Ellen Cheuk Alice Chan |
