However, the recovery of Hong Kong economy is mainly driven by exports of good and services, as domestic consumption and private investment remain sluggish. In the first three quarters of 2002, exports and imports of goods picked up by 5.3% and 4.4% respectively, while the exports of services surged by 10.3% in comparison to the year before. However, consumer spending edged downward by 1.4% and the gross domestic fixed capital formation precipitated by 6.0%. Meanwhile, as Composite Consumer Price Index declined by 3.1% in the first 10 months of 2002, Hong Kong continues to be reeling on the deflationary spiral, reflecting the protracted slack in consumer sentiment and the transmission of worldwide price slippage. The unemployment rate has been hovering over 7% after hitting a historic peak of 7.8% in the middle of 2002. Judging from these, it seems that our economy has yet to stagger out of the woods.

Over the past two years, the interest rate of Hong Kong Dollar has subdued to a historical nadir, following the consecutive interest cuts by the Federal Reserve Board of the United States. Nevertheless, its stimulating effects on the domestic consumption have thus far limited. This paradox is easier to understand in the context that consumption is taken as a function of household's lifespan financial resources and the prevailing real interest rate. On the one hand, the lingering slump in asset prices, notably the stock market and property market, has weighed on people's willingness and ability to spend, through the so-called negative wealth effects; while the spike in unemployment and a dim economic outlook have undermined their expectation about future income, making a further dent in consumer confidence.

On the other hand, under a deflationary environment, real interest rate has been staying on relative high side, which could defer consumption and hinder investment as well. In addition, with the economic integration between Hong Kong and the Mainland deepening, a convergence of factor and product prices is taking place across the boundary, which has resulted in a variety of cross-borer arbitrages and the leakage of Hong Kong's domestic investments as well as consumption. Suffice it to say, restoring the stability of asset markets, drumming up domestic demands and tackling unemployment should be placed at top of Hong Kong's task list.

Looking ahead, the outlook of global economy in 2003 warrants some optimism with caution, although uncertainties and risks could arise form the tension in Gulf, the consolidation of German economy, the structural reforms in both Japan and Western Europe, and the macroeconomic imbalances in the United States. After all, there have been signs that the Japanese economy is bottoming out. To the extent that the recent appreciation of euro and the mitigation of inflation have provided a room for European Central Bank to cut interest rate, the Euro-land economy is expected to gain momentum. In the USA, as a stronger economic recovery is now under way, the cloud of a "double dip" has mostly rolled by. The latest cut in US interest rates in November, coupled with continued US fiscal expansion, should render the desired boosts to the property market and consumer spending.

All in all, it is predicted that major developed countries will experience a modest growth in 2003, while keeping inflation at bay. This would help to keep the world trade staying aloft. As a result of the painful adjustments over the past years, Hong Kong has achieved considerable improvements in both cost structure and efficiency. Moreover, the weakening of Hong Kong Dollar in tandem with the green back has offered an additional boost to Hong Kong's competitiveness. In view of these, it is expected that the exports of goods and services will gather steam next year. With new policies on property market rolling out and the campaign to foster the local community economy set in motion, the odds are that a cyclical rebound in domestic consumption and investment will occur.

As always, the robust Mainland economy will gift a lift to Hong Kong, especially in respect of re-export, tourism and financial services. On the back of a remarkable 8% growth this year, China is most likely to embark on a new expansionary cycle. To honor the guarantees bound in its WTO accession protocol, China has been speeding up the pace in opening domestic market and service sectors, leading to the unleashing of immense opportunities for investment and trade. By virtue of its unrivalled geographic proximity, cultural affinity and economic ties with Mainland as well the first-mover advantages, Hong Kong is well positioned to be the prima beneficiary ex officio.

In sum, Hong Kong economy is faring well on the track of recovery. It is anticipated that a mild growth of 3.5% could be recorded in 2003, but unemployment rate would continue to stand at over 6%, and the lingering deflation may have a chance to turn around in late 2003.

At this stage, the world's economy is consolidating to gear towards a broad-based recovery, but the demand in international market is still somewhat slack under an environment of lukewarm growth and low deflation. To the extent that pricing is still a critical factor for market competition, Hong Kong manufacturers have to pursue better cost control, through streamlining operating process, re-allocating corporate resources, enhancing logistics management and diversifying suppliers. However, to stay competitive in the long run, Hong Kong companies should waste no time to press ahead with high value-added activities.