On the domestic front, signs of cooling demand are also becoming more evident. Retail sales volume growth slowed further to a mere 4.0% in June. The slowdown indicates an erosion in consumers' purchasing power as well as increasing unwillingness to spend. Looking ahead, retail sales value growth is likely to look decent driven by rising prices, but retail business in real terms is likely to be much less promising. We have revised downward our forecast of retail sales volume growth to 6.0% for 2008 as a whole from our previous estimate of 11.4%.

Labour market conditions remain encouraging thus far with the June unemployment rate hovering at a 10-year low of 3.3%. Nevertheless, total employment continued to decline and fewer new jobs were created, pointing to worsening conditions ahead.

While the economic engine looks set to lose further momentum, inflation is creeping up. Consumer price inflation surged to an 11-year high of 6.1% in June, from 5.7% in May. Non-food inflation jumped from around 2% at the beginning of the year to over 4% in the last two months, as high global food and energy price seemed to have filtered through to a wide range of consumer goods and services.

The pass-through is yet to be completed as global oil and commodities prices are still hovering at high levels. Nevertheless, the government's newly proposed HKD11 billion relief measures will help to suppress headline CPI somewhat. More importantly, the waning global demand will eventually dampen oil demand, putting a lid on oil prices and taming inflation. Taking all these into consideration, we expect inflation to remain at relatively high levels of 5.0% for both 2008 and 2009.

Looking ahead, the rising global inflationary pressure and risk of a global economic slowdown have heightened uncertainty to our economic forecasts. We have to be watchful for the downside risk brought by the protracted US slowdown, which seems to have spread around the globe and our region is not immune.

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