• Asian economic growth should sustain momentum in 2000 as adjustments in the emerging market economies have run their course. Meanwhile, the favourable economic development in industrialised countries will spell well for the economy of Hong Kong. Surges in net exports of both goods and services will spur the Hong Kong trade and service sectors.

• The Hong Kong economy would likely improve further this year on better sentiment, deepening corporate reform with advanced technology and more liquidity. Several positive developments have boosted the consumer and investor confidence and benefited the economy, including China's prospective entry into the WTO and the projects of science park, cyberport and the Disney theme park.

• Locally, public sector investment spending, particularly on the railway projects and other infrastructure projects, should continue to gear up.

• However, there remain concerns over the recovery momentum in real consumption and investment in anticipation of further US interest rate hikes, government's new tax measures and the structural unemployment problems.

Strong growth is expected in the final quarter of 1999

In the final quarter of 1999, Hong Kong's economy is expected to grow by 5.5% year-on-year. While the lower base effect was a factor behind the strong figure, the sizzling US economy and fast economic rebound of major Asian economies contributed to an unexpected surge in Hong Kong re-exports (up 12.2%). Exports in nominal terms rose by 10.5% (against a 4.4% rise in the previous quarter). Meanwhile, exports of services improved further, partly shown by the continued pick-up in inbound tourism.

Several positive developments in the second half of 1999 have boosted the consumer confidence and spurred the economy, including China's prospective entry into the WTO and the projects of science park, cyberport and the Disney theme park in Hong Kong. In addition, moderate gains in consumption on the bullish equity market as indicated by strong retail sales volume (4.7% year-on-year rise in the last quarter of 1999 against 1.7% in the third quarter) also reinforced Hong Kong's recovery momentum.

However, the employment situation will only stabilise as there are no signs that the corporate restructuring process will end. The seasonally adjusted unemployment rate still hovered at around 6.1% in the last quarter. Meanwhile, investment demand in the private sector remained sluggish because of high real interest rates and cautious bank lending policies.

The price figures revealed that Hong Kong was still in a deflationary mode, albeit at a slower rate of decline. The composite CPI declined by 4.1% during the last quarter of 1999, compared with 5.9% deflation in the previous quarter.

Better Outlook Is Expected

We project that the Hong Kong economic growth momentum would sustain in the first quarter of 2000, (likely by more than 5%) mainly reinforced by strong growth in re-exports, better consumer sentiment, as well as the base effect. Meanwhile, the improvement in real GDP will be further enhanced due to festive buying ahead of Lunar New Year.

Looking ahead, net exports of both goods and services are still the major driving forces this year, as the impressive recovery in major Asian economies and in Europe, as well as the robust US economic activities, will still augur well for Hong Kong exports.

For the trade in services, the cross-border financial activities in the Asian region have shown signs of recovery. With the improved economic environment, regional financial markets are expected to enrich more activities and this will boost Hong Kong's exports of financial services in coming months. Besides, the formation of Growth Enterprise Markets can also provide another channel for fast-growing information technology companies to raise equity capital in the region. Meanwhile, mainland big enterprises will also be likely to tap into Hong Kong's main board so as to improve their competitiveness.

Locally, public sector investment spending, particularly on railway and other infrastructure projects, should continue to gear up.

For the property market, we do not change our views that it is being clouded by uncertainties about upward interest rate movement and excess housing stock in the future. Nevertheless, the improved economic conditions, higher household affordability and the return of investor confidence will help support the property market, especially the grade-A office and luxury buildings. Due to the China's impending entry into the WTO, many foreign companies are likely to use the SAR as a headquarter base for the mainland market.

Deflation will gradually diminish with signs of moderate broad-based economic recovery, large oil price increases and mild gains in the private sector housing rentals. We expect consumer price deflation will disappear at the end of the second quarter. Commodity price pressures from external sources (in particular the surging crude oil prices) and recovery in aggregate demand will likely bring back mild inflation in the second half of 2000, lowering real interest rates.

Some Concerns

Real investment spending in the private sector could see modest gains in the first six months on the still high level of real interest rates, banks' prudent corporate lending attitudes and the pending approval of China's WTO entry. We expect investors with caution will remain sidelined until China clears the obstacles into the WTO (likely in the first half).

There remains concern over further US interest rate hikes and the sustainability of recovery in Japan, which will dampen Hong Kong's growth pace. The market with great concerns is watching whether the US stock market will undergo a significant adjustment or the private sector will shrink to correct its large saving shortfall.

To slash the budget deficit and widen the tax base, the Hong Kong government has vowed to consider more revenue-raising sources, particularly the introduction of sales tax and land departure tax. While the rebounding economy will help reduce the deficit (much less than the official projection of HK$ 36.5 billion in 1999/2000), the market is concerned about whether the coming March's budget will involve any relevant tax plans which may cast a shadow over a budding recovery in consumption.

Worries also remain on the labour market as slow improvement in unemployment on the ongoing corporate reform, as well as increasing population and low wage growth will dampen consumer demand.

Summary

We expect the government will easily achieve 1.8% growth target in 1999, benefiting from the robustness of the global economy and resurgence of Asian economies. On the stronger export growth figure in the second half of 1999, we project that the overall economic activity in Hong Kong may rebound by about 2.0% in 1999.

Looking ahead, external demand will remain the key driving force in 2000. Meanwhile, the agreements on the Disneyland project and China's entry into the WTO will improve market sentiment and lure capital inflow, thus boosting the economy.

Given the better projection of the world economic environment, deepening corporate reform with advanced technology and more market liquidity, Hong Kong's economic growth will likely pick up further and sustain at about 4.8% growth (higher than our previous forecast of 4.0%) this year. However, we are watching when consumption and investment spending will gather full steam to help spur the economy further. Fortunately, the forthcoming approval of the China's WTO entry will likely be a strong catalyst this and next year.

Daniel Chan (Senior Economist, Economic Research, DaoHengBank)

Tel: (852) 2218 8230   E-mail: Danielch@guoco.com