• After expanding by 6.9% growth in the fourth quarter of last year, the Hong Kong economic growth moderated to 2.5% in the first quarter, mainly attributable to trade slowdown, sluggish consumption and higher base for comparison.



• The global economic moderation, particularly related to the sharply economic easing in U.S., has dragged on the Hong Kong export performance with total export growth only gaining 4.2% in the first quarter.
  
  
• Locally, the deteriorating labour market conditions, arising from job mismatch, sluggish property market and the downturn in trade-related sectors, have restrained consumer spending. Consumption in the first quarter only posted modest growth of 2.8%. Nevertheless, the impressive growth of investment spending (particularly in machinery and equipment) has helped to cushion Hong Kong economic deceleration.
  
  
• Going forward, unlike last year, investment spending (especially in machinery and equipment), instead of export trade, will be the major driving force for the Hong Kong economy. As China and U.S. have reached trade deal on sensitive trade-liberalisation issues, China's bid is now poised to accelerate. It is likely that the WTO entry might be granted by the end of this year or early next year after the general meeting of WTO in November.
  
  
• Despite the economic weakening in the U.S., EU and Japan, the surprisingly strong Chinese economy (8.1% economic expansion in the first quarter) will help offset a part of ill effects of the global downturn.
  
  
• The job loss concerns, as well as the negative equity on mortgage, will continue to restrain consumer spending in the months ahead. Nevertheless, thanks to the relieving burden of interest payment on mortgage after 250 basis points rate cuts in the first five months and the moderate wage rise, consumer spending will probably revive gently in the second half.
  
  
• Meanwhile, with the widespread price discounts offered by retailers, lower food prices, stable residential rental market, as well as the weakening of Asian currencies, deflation will probably persist until the last quarter of this year. It is expected that consumer sentiment will likely improve on expectation of mild economic growth in the second half to contain deflation.
  
  
• Although the first quarter's real GDP growth is better than our expectation, we still maintain our growth forecast at 2.6% in 2001 on the mounting risk of downturn in merchandise exports (2.4% fall in export value in April) and mild rebound in consumption demand.
  
  

Analyzed by the expenditure components, the private consumption expenditure rose moderately by 2.8% year-on-year in the first quarter. Despite a series of interest rate reduction, the growth momentum of consumer spending has stagnated since the fourth quarter of last year as consumers have turned cautious on spending in the light of ongoing economic restructuring, global economic slowdown, equity market correction and the deteriorating labour market conditions.

Fortunately, with the transformation towards knowledge-based economy and the preparation for the prospective China's WTO entry, gross domestic fixed capital formation increased remarkably by 13.8 percent, with the main impetus coming from the strong growth in machinery and equipment (up 22.5 percent).

On the external front, with the higher base of comparison and the downturn of global demand, merchandise export growth in the first quarter slowed sharply to 4.2 percent, after surging 13.3 percent in the fourth quarter of 2000. Meanwhile, import growth also moderated to 5.3 percent (against 13.4 percent rise in the fourth quarter of 2000) on the slack local consumer demand and shrinking re-export growth.

On the invisible trade, in the presence of higher base effect, the growth momentum of exports of services eased but still posted 6.4 percent gain on the continued surge in offshore trade and a further rise in inbound tourism. Meanwhile, imports of services picked up with 5.5% expansion in the first quarter, mainly attributable to the surge in outbound trips during the population census period in March.

On the price front, deflationary pressure has gradually eased amidst moderate gains in wage, dissipating downward pressure of rental costs, as well as the upward adjustments in some of Government fees and public utility charges. The Composite Consumer Price index, with the reference to the 1999/2000-based series, was down by 2.0% in the first quarter of 2001, from 2.5% decline in the fourth quarter of 2000.

Along with slowdown in economic activities, the seasonally adjusted unemployment rate in the first quarter edged up to 4.6% from 4.4% in the last quarter of 2000. The construction and real estate sectors showed a more distinct rise in unemployment. This was largely attributable to the slackening in the property sector.

We agree with the government that the slowing of the global trade will continue to drag on Hong Kong's economic growth in the near term. The government's new projections of 3% economic growth and 1% deflation for 2001 seem to be sensible and reflect the new development. However, the government's projections are vulnerable to the following concerns and would be worth cautious monitoring.

Concerns and Outlook

Going forward, unlike last year, investment spending (especially in machinery and equipment), instead of export trade, will be the major driving force for the Hong Kong economy. As China and U.S. have reached trade deal on sensitive trade-liberalisation issues, China's bid is now poised to accelerate. It is likely that the WTO entry might be granted by the end of this year or early next year after the general meeting of WTO in November.

We agree with the government that the spillover effects of economic deterioration in U.S., Euro zone and Japan still put the economy at some risk through considerable weakening of external trade. However, the surprisingly strong Chinese economy (8.1% economic expansion in the first quarter) will help offset a part of ill effects of the global downturn.

Locally, domestic asset markets performance could influence the consumer sentiment in the period ahead. In addition, the ongoing economic restructuring and global economic moderation have weighed on the labour market. The job loss concerns, as well as the negative equity on mortgage, will continue to restrain consumer spending in the coming months. Nevertheless, thanks to the relieving burden of interest payment on mortgage after 250 basis points rate cuts in the first five months and the moderate wage rise, consumer spending will probably revive gently in the second half.

Meanwhile, with the widespread price discounts offered by retailers, lower food prices, stable residential rental market, as well as the weakening of Asian currencies, deflation will probably persist until the last quarter of this year. It is expected that consumer sentiment will likely improve on expectation of mild economic growth in the second half to contain deflation.

Although the first quarter GDP growth figure is better than our expectation, we still maintain our growth forecast at 2.6% in 2001 on the mounting risk of downturn in merchandise exports (2.4% fall in export value in April) and slackening consumption demand.

Daniel Chan
Economic Research
Tel: 2218-8230