Looking back, Hong Kong's economy rebounded from the doldrums in 2002 and climbed up steadily in the subsequent years. Despite a higher base, Hong Kong's economy again enjoyed robust growth this year, reflecting that the momentum for expansion still holds. On the domestic front, a healthy cycle featuring dynamic interactions between employments, local spending and investment has taken shape. Along with the revival of labor market, local spending was continuously on the upbeat with private consumption expenditure rising by 3.9% in the first three quarters of this year; while the gross domestic fixed capital formation picked up by 2.5%, indicating that investment activities in our economy continue to be vibrant. In the foreign trade arena, on the back of the continued growth in overseas markets, the ongoing trade boom in the Mainland, as well as the upsurge in inbound tourists, Hong Kong's exports of goods and services also attained significant growth, recording an increase of 11.1% and 8.5% respectively in the first nine months of the year as compared to the same period last year.

Riding on the three-pronged developments in external trade, local spending and investment, Hong Kong's economy is currently experiencing a balanced and solid expansion, enabling it to rise to various challenges from the external environment such as oil price hikes, persistent increase in the US interest rate, change in the Renminbi exchange system, Sino-US textile negotiations, and the threat of avian flu.

Looking ahead, the fundamental factors supporting the continual growth of Hong Kong's economy would mostly remain unchanged in the coming year. Furthermore, since many unfavorable factors in the external environment have showed up, their real and psychological effects upon our economy should no longer be overestimated. After twelve consecutive increases, the US interest rate is topping off and is much likely to turn around in the latter half of 2006. The belated interest rate uptrend in Hong Kong could then reverse, resulting in relatively mild dampening effects on local spending and particularly the property market. On the other hand, the accelerated recovery of the Euro region, revitalization of Japanese economy and the steady growth in most Asian economies will help offset the influences of a possible slowdown in the US economy. Adding that the US and the EU have reached agreements with China on textile and apparel exports, the uncertainties in the external environment will be diminished to a certain extent and Hong Kong's export trade of both goods and services are therefore expected to maintain solid growth in the coming year.

The Mainland's economy performed remarkably in 2005. It is estimated that its GNP growth rate will stand at 9% this year and such high-speed growth will extend into 2006. Facing the challenges of protectionism and the unrelenting need to ameliorate the structure of fixed asset investment, the Mainland government is bound to quicken the pace in shifting the mode of economic development through stimulating domestic demand to sustain economic growth. The recent exchange rate reform and a series of measures like supporting farmers and the lift of individual tax allowances are indicative of this policy direction. The transformation of Mainland from an export-led and investment-powered economy to one driven much more by domestic consumption will provide ample opportunities for the export of Hong Kong products and services, and for our investments in the Mainland. Also worthy of noting is that the positive impacts of CEPA upon Hong Kong's economy have begun to crystallize this year. In the first three quarters of the year, Hong Kong's domestic exports to Mainland China surged by 16.9% year-on-year, whereas total domestic exports in the same period rose by a meager 1.4%. It is believed that the trade-creating and investment-stimulating effects of CEPA will further strengthen in 2006, giving a broader and far-reaching boost to our economy.

In a nutshell, Hong Kong's economic outlook for 2006 is still optimistic. Although many economic indicators will a bit pale as compared with 2005, yet Hong Kong's GDP will not fail to attain a growth rate of about 4.5%. It is expected that the inflation rate will increase in a gradual manner with the composite CPI edging up by 2%, and the unemployment rate will drop further to 5% or below.