The near-term outlook for the Hong Kong economy is overshadowed by the weakness of the US economy. Exports to the Mainland and the EU have been losing momentum lately. Total export growth for 2008 is expected to decelerate to 7.2% yoy, from 9.2% in 2007.

On the contrary, the domestic demand is robust. Hong Kong's retail sales achieved eight consecutive months of double-digit growth, up 16.8% yoy in December 2007.

The labour market is tight. Unemployment rate dropped to a 10-year low of 3.4% in December 2007. Demand for workers is likely to sustain in the near term, as business activities stay robust during the run-up to the Lunar New Year.

But, the trade sector, which employs the largest number of people in Hong Kong, has not been adding new jobs since mid-2007. Unemployment rate is likely to rise in the second half of the year and reach an average of 3.8% for 2008.

Inflation is of increasing concerns. CPI inflation accelerated to 3.8% yoy in December 2007, from 3.4% in the previous month, on rising rentals and food prices. The underlying forces, including the strong demand, low interest rate environment, weakening currency and growing strength of the renminbi, all point to upside inflation risk.

But, the odds of run-away inflation are low, as another round of property rate concessions is likely to knock the headline CPI down, coupled with a moderating external demand, CPI inflation for the full-year of 2008 is only expected to go up slightly to 3.5%.

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