Indeed, since the second half of year 2001, Hong Kong economy has been characterized by an unbalanced growth, strong on the external sectors but feeble domestically. While rapid growths have been recorded for both goods and service exports, local spending and investment are still stuck in the mire of stagnation. This pattern had not broken off even under the severe impact of SARS. In the second quarter this year, consumer spending decreased by 2.6%, fixed capital formation plunged by 5.7% and service exports fell drastically by 13.9%. However, merchandise export and import values still leaped by 14.3% and 10.9% respectively. It seems that although SARS dealt a head-on blow to local tourism and consumption, it did not tarnish our trading performance, which is dominated mostly by activities outside Hong Kong. On the other hand, to the extent that local spending and private investment had been persistently reeling on a downtrend over the past months, SARS' devastating effects could be somehow contained as the bottom had been hit on these areas.

Fortunately, following a bumper harvest of positive news, including rapid stamping-out of SARS, the signing of CEPA, and the opening up of the "individual visit" of Mainlanders, Hong Kong economy bounces back with unbelievable vigor in the second half of this year. Not only has it experienced pounced revival in tourism and related industries, but also recorded a 2% positive growth in private consumption in the third quarter, for the first time over the past two years. Moreover, unemployment rate has also dropped, down from the historic peak of 8.7% to 8.0% currently; the property prices are firming, and the stock market begins to bloom. All these have indicated that Hong Kong economy is now back onto the track of growth.

Safely enough, we can be more optimistic towards Hong Kong economy in 2004. Driven by the renewed momentum of global economic growth, coupled with a weak US dollar - which is not likely to reverse the course in the short term, Hong Kong export trade is expected to keep up the steam next year. The major developed countries are gradually resuming the synchronization of economic development, as the EU economy has begun to bottom out and recovery has taken hold in Japan. Though still bothered by the double deficits in trade and public finance, the US will be blessed with productivity gain, lenient monetary and fiscal policies, and continuously exuberant domestic consumption, which would help to make its brisk economic recovery sustainable.

Besides, benefiting from the growth in export, stronger internal demand, appreciation of local currency, and the wealth effect brought about by active stock markets, most of the East Asian economies are bound to have another bonanza year. Indeed, in the first nine months of 2003, exports from Hong Kong to European Union, Japan and other Asian regions (excluding Japan and China), jumped by 13%, 14% and 12% respectively over the corresponding period last year, more than enough to counterbalance the 3% drop in the US market. Such subtle changes in the structure of our export market are expected to continue, and they have pointed to Hong Kong's increasing ability to benefit from the flourishing intra-regional trade while reducing risks through market diversification.

In 2003, the Mainland economy continued to forge ahead on an upswing, recording a remarkable growth estimated at above 8.5% in real terms. However, given the recent price hike in agricultural products, fuel and raw materials, together with the signs of investment overheat arising from sectors like automobile and real estate, it is foreseeable that the Central Bank will adopt a more prudent stance and the Government may stage a focused structural adjustment, while trying to maintain the stability and continuity of its macroeconomic policy. Although China economy will be more likely to slow down in 2004, it will have no difficulty in achieving a 7% growth.

At the same time, due to reduction in tax rebate for exports and the Sino-US trade frictions, China's export trade may lose some of its previous luster. However, with a strengthening RMB and the elevating domestic demand, the import trade would have a bigger room for growth and the outbound investments by Chinese enterprises are expected to gain further momentum. Both scenarios will bring new business opportunities for Hong Kong. Besides, with CEPA's details being hammered out and put into implementation, its dynamic benefits such as trade-creating and investment-inducing effects will gradually be seen next year. CEPA would not only pave the way for Hong Kong enterprises to tap Mainland's vast domestic market, but also provide an incentive for foreign companies to conduct strategic investments in Hong Kong, so as to be qualified for the Hong Kong origin requirements. In the longer term, CEPA would serve as a open-end platform, whereby Hong Kong and Mainland could re-shape division of labor, deepen economic synergy, and speed up two-way movements of goods, people, technology, capital and information across the border, thus taking a step further towards the establishment of an integrated common market.

Hong Kong's economic growth in 2004 should be a broad-base one, different from the last two years when re-export alone put its shoulder to the wheel. Although a new cycle of interest raises may set in latter next year in the US, the interest rate for the coming two years or beyond will remain at a favorably low level. Also, partly as a result of the flourishing asset markets and continuous influx of overseas investment, local financial market is abundant in liquidity. Following the drop in unemployment rate, the tapering-off of negative equity and the rapid improvement on market sentiment, the pent-up spending power of local community will be released sooner or latter. Historically, private investment would usually move in tandem with consumer spending. Now that the business outlook is becoming clear and sanguine, it is believed that domestic fixed capital formation will stage a significant pick-up and start to take up the baton since the fourth quarter this year.

Boosted by the joint forces of exports, local spending and private investment, Hong Kong's real GDP growth is forecasted to reach 5% for 2004. The protracted deflationary spiral will continue to abate and probably come to its end in the latter half of next year. Meanwhile, the labor market will further improve with unemployment rate falling back to around 7%.