• There is no fundamental shift in factors that boost the recovery of the global economy after the carnage of 14 April. The rapid improvement in technology, especially information technology, and abundant liquidity will help the world to weather the burst of the technology stock bubbles. In particular, the international banking system is unscratched as most technology stocks raised funds from the venture funds and capital markets.

• With the recent slump in technology stocks, hot money will likely continue to seek refuge in the near term in the US treasury bond market, as already reflecting by the upsurge in US treasuries, as well as the resilience of the US dollar. Meanwhile, the overall correction in the equity prices will continue to reflect the survival of the fittest.

• In comparison with last year, global economic growth is accelerating on the back of the robust US economy and the strength of the European Union rebound and the Asian economic resurgence.

• Aided by the vigorous external demand and rapidly improving local investment sentiment, the Hong Kong economy has rebounded 8.7% in the fourth quarter of last year, the largest year-on-year growth since 1988. Going forward, the economic performance in this year will remain encouraging despite the firm rate outlook and the recent technology stock corrections.

• The agreements on Disneyland project and China's entry prospects into the WTO have lured more portfolio inflow to Hong Kong and the foreign direct investment flow will follow suit, likely in late 2000 and afterwards. We project that the overall economic activity in Hong Kong economy may grow by about 5.7% with 1% deflation in 2000.

• With the favourable external environment, a steady pick up in private consumption and the recent strong industrial production, the growth momentum in China has become stronger and more broad-based with insulation from the recent global stock market slump. Besides, China's economy will remain well supported by strong exports and the government's expansionary fiscal and monetary policies, growing by about 7.5% this year.

For the battered US stock market, all the three major US indices posted their biggest single-day point losses on 14 April, raising concerns about the asset market deflation and health of the US economy. In fact, for the technology shares, they have started losing their allure when a judge ruled in favour of the Justice Department's antitrust lawsuit against Microsoft on 4 April. More importantly, the enthusiasm for technology stocks seems to be waning as institutional investors are concerned over these stocks' performance, given higher interest rate expectations. The disillusionment with tech stocks has been even more pronounced elsewhere in the world, for example, Softbank and Hikari Tsushin in Japan have hit downward trading limits most days in the past weeks.

Nevertheless, there is no fundamental shift in factors which boost the recovery of the global economy after the carnage on 14 April. The rapid improvement in technology, especially information technology, and abundant liquidity will help the world to weather the burst of the technology stocks. In particular, the international banking system is unscratched as most technology stocks raised funds from the venture funds and capital markets.

With the recent slump in technology stocks, hot money will likely continue to seek refuge in the near term in the US treasury bond market, as already reflecting by the upsurge in US treasuries, as well as the resilience of the US dollar. Meanwhile, the overall correction in the equity prices will continue to reflect the survival of the fittest.

The technology counters with the burst of the dreaming bubble will perform worst in the coming weeks. Some of the old economy's stocks, however, may provide more exciting investment opportunities in the adjustment for the funds as if the rest of the world, in particular, Japan and Europe, have continued to restructure the "old economy" and gear up their IT investment strategy and boosting output and productivity. We expect funds will not write off the New Economy sector entirely and likely return in the third quarter as for some technology stocks having strong earnings growth and being the most immediate beneficiaries of the global boom in e-commence can still survive in this market correction.

In comparison with last year, global economic growth is accelerating on the back of the robust US economy and the strength of the European Union rebound and the Asian economic resurgence.

The US economic growth was running at an unsustainable pace of around 7.0% p.a. in the fourth quarter of 1999 (much higher than the 3.5% trend growth), leading to the widening of the current account shortfall and asset inflation. Despite the improving productivity, the red-hot US economy with very tight labour market will most likely prompt the Fed to raise interest rates proactively by 0.5% in May and 0.25% in June, respectively, to keep the inflation at bay. Against this background, the US economic growth may slow down to the trend growth rate in the second half of this year. The market with great concerns is watching whether the current US stock market correction will lead to a hard landing. Given the surging productivity and improved corporate profit outlook, we project that the US economy with soft landing will still post 4.5% growth in 2000, better than 1999's 4.2%.

The euro area has generally posted moderate economic expansion (3.2% growth forecast) this year, partly due to budding recovery in domestic demand but still vulnerable business confidence. Aided by the recent weakness of the euro, the euro area has continued to pick up on the back of strong export growth and investment revival. However, there exist great worries that the persistently high fiscal deficit issue and labour rigidity among member countries will lead to higher interest rates and drag on the revival pace.

In the second half of 1999, the Japanese economy turned out to be far worse than expected and slipped back into recession, after growing moderately in the first half. With the ongoing corporate restructuring in association with mounting unemployment, the private consumption was particularly weak. However, growth is expected to turn up again in the first half of this year as private capital spending momentum is surprisingly strong and the market sentiment in Japan has improved, as reflected by the recent Tankan survey. Weakness in the Japanese economy may re-emerge as there exist no signs that consumption has gained more impetus. Meanwhile, the appreciation of the yen, together with rising long-term interest rates, resulted from the government's fund-raising program to finance the mounting fiscal deficit, will be great concerns. In addition, the ruling coalition parties have slowed the nation's structural reform and are preoccupied by the launch of vote-catching election program (to be held before October).

In US, the Fed hiked rate five times since last June, bringing the benchmark lending rate, the Fed funds rate, to the current 6%, in order to slow down the economy and contain inflation. However, the unemployment has remained near a 30-year low at 3.9% in April and consumer spending is strong. In fact, the figures released showed that the advance in CPI in March highlighted the strongest pace in nearly a year, hinting that inflation pressure is starting to broaden out. Even though the strong increases are mainly caused by the higher oil and energy prices, the Fed is mostly likely to raise interest rates proactively in the coming two months with a total of 0.75% rate hike with a view to cooling down the economy. It is widely expected that the rates, supporting the US dollar's strength, will then move sideways until November's presidential elections.

In the EU, in the presence of some signs of inflation, the ECB clearly has a bias towards further monetary policy tightening but held back by the politicians. In the coming months, there may be a danger that policy will be tightening too late, hampering the euro's recovery.

In Japan, even though Masaru Hayami, governor of the Bank of Japan, who suggested that a rise of interest rate may be imminent, two factors are likely to maintain the 'zero interest rate policy'. First, there are worries that higher interest rates would lead to stronger yen and downfall in investment, and hence choking the fragile export-led economy. Second, as the Japan's banks are the major holders of government bonds, any rate hikes leading to a massive sell-off in the bond market will seriously hurt the still weak and undercapitalised Japanese banks.

Aided by the vigorous external demand and rapidly improving local investment sentiment, the Hong Kong economy has rebounded 8.7% in the fourth quarter of last year, the largest year-on-year growth since 1988. Going forward, the economic performance in this year will remain encouraging despite the firm rate outlook and the recent technology stock corrections.

The external sector continues to lead the recovery on the back of strong China's external trade, resurgence of Asian demand and the strong import absorption from US and Europe. Besides, the Hong Kong's prices of goods have become more competitive as the currencies in most of the Asian region have been appreciating on the back of strong economic recovery. However, the pace of growth may be dragged down on the expectation of a slowing down US economy in the second half of this year. For the trade in services, the inbound tourism revival and the strong rebound in the cross-border financial activities in the Asian region will have its performance to expand further. Meanwhile, Mainland enterprises, particularly heavy-weighted one, will also be likely to tap into Hong Kong's main board so as to improve their competitiveness to compete with foreign companies once China joins the WTO.

For the domestic side, private consumption will continue to grow mildly amidst the easing deflation and the stabilised employment outlook. However, the recent correction in the stock market will likely put a drag on it for the time being. Even though the high real interest rates may also dampen private sector investment spending momentum, business prospects and the anticipation of China's WTO entry will sustain the capital spending.

Deflation will gradually disappear in the next few months with signs of moderate revival in local demand, more price hikes from public sectors and rising commodity prices. The speed of easing in deflation, however, would depend on how consumers are affected by economic recovery and the adjustment in the share market, and whether the private sector housing rentals are able to recover. We expect the consumer price deflation will remain in the first half of 2000 but commodity price pressures from external sources and recovery in demand will likely bring back mild inflation in the second half of 2000, thus lowering real interest rates.

For the property market, it is being clouded by uncertainties about interest rates movement and excess housing stock in the future. Nevertheless, the improved economic conditions and the return of investor confidence will help to support the property market. On anticipation of China's entry into the WTO (likely in the second half of 2000), it is reported that the influx of foreign capital has already boosted the Hong Kong property market, especially the grade-A office and luxury buildings, as many companies are likely to use the SAR as a headquarters base for the mainland market.

The agreements on Disneyland project and China's entry prospects into the WTO have lured more portfolio inflow to Hong Kong and the foreign direct investment flow will follow suit, likely in late 2000 and afterwards. We project that the overall economic activity in Hong Kong economy may grow by about 5.7% with 1% deflation in 2000.

With the favourable external environment, a steady pick up in private consumption and the recent strong industrial production, the growth momentum in China has become stronger and more broad-based with insulation from the recent global stock market slump. Besides, China's economy will remain well supported by strong exports and the government's expansionary fiscal and monetary policies, growing by about 7.5% this year. More important, the prospective China' WTO entry has positively affected the trade and investment sentiment, resulting in an impressive 8.1% economic growth in the first quarter of 2000. The WTO entry will boost China's image and profile internationally, resulting in brisker inbound tourism. Much cheaper import cost, the upholding of export VAT rebate, as well as considerable influx of foreign direct investment will also help spur aggregate demand and maintain surplus in the balance of payments.

On the price issues, China is still in the brink of deflation, posting deflation of 0.2% in CPI and 2.1% in RPI, reflecting soft domestic demand. Given the recent economic pick-up, we expect that the price recovery should be sustained to bring China out of the deflationary spiral in the coming months.

We believe that the yuan will remain stable this year, mainly well supported by the rising trade account surplus and the gradual revival in foreign direct investment. We still think that the chance of China to alter its exchange rate system this year is low as capital control will be an effective instrument to insulate China from external financial shocks during the WTO entry. Nevertheless, the monetary authority will loosen the control on the commercial banks' lending rate, likely through the widening of the interest rate band.

Daniel Chan (Senior Economist, Economic Research, DaoHengBank)

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