Looking ahead, with the stagnant US market having already dragged down Mainland's export growth to 21.3% yoy in 1Q08, from 25.7% in 2007, it would be difficult for Hong Kong's exports to maintain its impressive performance.

On the domestic front, the labour market remained relatively tight, but has been lackluster in adding new jobs. The March unemployment rate edged up to 3.4%, from 3.3% in February, due to a drop in total employment.

The momentum of job creation looks set to slow as signs of cooling demand become more apparent. The trade sector was the first to feel the pain and the heightened risk in the global credit market also impaired worker demand from the local financial services sector.

Domestic demand remained supported by rising wages with March retail sales growing 20.2% yoy in value and 13.0% in volume. However, the upside surprise was mainly due to rising prices as the gap between the value and volume growth widened from four to five percentage points in the last few months to seven percentage points in March on elevated food and energy prices.

March CPI inflation eased to 4.2% yoy, from 6.3% in February, due to property rates concessions. Taking out this factor, the underlying inflation crept up to 5.3% from 5.1% in the previous month on high food prices.

The inflation spike is likely to have peaked, but the pace of easing will depend on how fast food supply can re-adjust. At this stage, we still see a relative mild inflation rate of 3.5% for the full-year of 2008, as signs of cooling demand are becoming more apparent. Nevertheless, the elevated global food and energy prices pose upside risk to inflation.

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