Looking ahead, the US slowdown and its spillovers to other economies are clouding the prospects of Hong Kong's exports in the coming months. Although January exports soared 15.8% yoy, the figure was distorted by exporters rushing shipments ahead of the Lunar New Year holidays. We see total export growth decelerate to 6.1% yoy in the first two months, which implies export would decline by 5.7% in February. For 2008 as a whole, we keep our view that total export growth will ease to 7.2%.

Strong domestic demand is likely to provide buffers against a sharp slowdown in the external sector. Private consumption spending is expected to stay robust, underpinned by good employment prospects, rising wages and wealth. The government's tax rebates and other concessionary measures would also help boost consumer confidence.

Hong Kong's retail sales registered nine straight months of double-digit growth, up 23.3% in January. Again, the timing of the Lunar New Year helped boost spending during the month.

The labour market remained tight with January unemployment rate hovering at a 10-year low of 3.4%, as business usually surged in the run-up to the Lunar New Year holidays. But the unemployment rate is likely to rise as waning demand for workers from the trade sector is likely to be more obvious in coming months.

Pricing in more challenging external factors, we are still cautiously optimistic and expect only a moderate slowdown to a 5.0% real GDP growth for 2008.

Rising inflationary pressure poses another challenge for the Hong Kong economy. January CPI inflation eased to 3.2% yoy, from 3.8% in the previous month, due to property rate concession. Netting out the one-off effect, the underlying inflation was 4.3%.

The underlying forces point to growing price pressure, but the government's waiver of property rates for all the four quarters in 2008 and electricity subsidies will knock down the CPI reading. Therefore, we have revised downward our CPI forecast for the full year of 2008 from 3.5% to 3.2%.

Hong Kong Economy Expanded Briskly in 4Q 2007

Hong Kong's 4Q07 real GDP growth accelerated to 6.7% yoy and turned in a robust growth of 6.3% for the full year of 2007, in line with our earlier estimate.

The figure supported our long-standing view that domestic demand was the key driver for growth. Private consumption expanded by 10.4%, two consecutive quarters of double-digit gains. Investment spending picked up strongly to grow at 10.4% yoy, after a merely 1.0% growth in the previous quarter. Export growth softened from 6.4% yoy to 5.9%, the lowest in 6 quarters.

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China Economic Monitor (March 12, 2008). Hang Seng Bank Limited. All rights reserved. Reproduction of article(s) in whole or in part is permitted provided the source is quoted. Please direct any inquiry to Treasury, Planning and Research Department, G.P.O. Box 2985, Hong Kong.