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August, 2001 Hong Kong Economic Update |
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All the major indicators in second quarter suggest the ongoing weakness of the Hong Kong economy, which is due to fast global economic downturn. Recently released economic figures have underscored sluggish US economic growth while Japan and EU are experiencing economic deterioration, thus dimming the Hong Kong export outlook. Meanwhile, imports of capital goods, as well as raw materials and semi-manufactures in May-June started to contract, highlighting the slowdown in investment and production. We therefore lower our economic growth forecast from 2.6% to 2.0% for Hong Kong in 2001.
Domestically, retail sales figures were slightly better-than-expected on lower interest rates and hefty price discounts with growth of 5% in volume in the second quarter against 2.5% in the first quarter. However, the growth momentum is unlikely to be sustained as retail consumption is still under pressure on persistent deflation, negative equity on mortgage, fragile consumer confidence and the worsening job market.
Externally, hurt by the ongoing global slump, export growth has dipped into the negative territory since March. Meanwhile, import growth has started to contract on slowing investment and slacking retail business. Total export growth dropped by 4.7% in the second quarter from 2.3% growth in the first quarter, while import growth also fell 3.4%, down from 3.6% rise.
On the price side, the overall consumer price level fell 1.3% in the second quarter (against 2.0% deflation in the first quarter). The figure continues to show that sluggish consumption remains an issue on cautious sentiment caused by the recent deterioration in Hong Kong's unemployment and uncertain economic outlook. It was evidenced by the sharp decline in prices of durable goods.
On the job market, unemployment rate remained at 4.6% for the period of April to June. However, large companies are still struggling with diminishing profit, which could lead to further layoffs, putting pressure on the labor market and the deteriorating economy.
Following the first quarter's 2.5% real GDP growth, we project a mere 0.5% expansion forecast for the second quarter on unfavourable net merchandise exports, slowing investment and mild consumption demand. In the second half, Hong Kong economic growth will be mild on investment pick-up but will still succumb to the lethargic global trade growth.
Nevertheless, Hong Kong export outlook is expected to revive gradually next year on the expectation of a mild U.S. economic recovery which will arise from a series of interest rate reduction and US tax cut policy. More importantly, China is expected to achieve its 15-year quest for the admission of World Trade Organization (WTO). Hong Kong private sector investment and foreign direct investment, arising from the China's WTO entry, will remain robust. However, we are concerned that economic restructuring, cross-border consumption and prudent propensity to consume will continue to drag on consumption revival and general price recovery. We expect inflation to remain flat and real interest rate will remain high next year. Against this background, supported by the expected recovery of exports and strong investment demand, Hong Kong economic growth will likely accelerate to 3.5 percent in 2002.
| Revised Projections of Main HK Economic Indicators | ||||
| Year-on-year change (%) |
1999
|
2000
|
2001f
|
2002f
|
| Private consumption expenditure |
0.7
|
5.4
|
2.3
|
3.5
|
| Government consumption expenditure |
3.3
|
2.1
|
3.0
|
2.4
|
| Gross domestic fixed capital formation |
-17.5
|
9.8
|
8.7
|
12.0
|
| Exports of goods (f.o.b.) |
3.7
|
17.1
|
-0.4
|
4.0
|
| Exports of services |
5.7
|
14.1
|
2.0
|
5.0
|
| Less: Imports of goods (c.i.f.) |
0.1
|
18.1
|
0.6
|
5.6
|
| Less: Imports of services |
-3.1
|
2.1
|
1.8
|
5.0
|
| Real GDP |
3.0
|
10.5
|
2.0
|
3.5
|
| Inflation |
-4.0
|
-3.8
|
-1.2
|
0
|
| Unemployment |
6.2
|
5.0
|
4.7
|
4.7
|
Daniel Chan
Economic Research
Tel: 2218-8230
