Hong Kong economic growth moderated significantly to 4.2% in 2Q08 from a revised 7.3% in 1Q08 on unexpectedly sharp deceleration of the growth of consumption spending. Domestic demand, the key pillar for growth for the last few quarters, seemed no long provide much buffer for the softening external demand.

The second quarter GDP figure sends a key message -- tougher times lie ahead. Trade performance is likely to be depressing, as the global economy is on the verge of a synchronized slowdown. Domestic demand will have to be the sole engine for growth, but it too is shifting to lower gears.

Consumption spending looks set to ease as soaring inflation is eroding consumers' purchasing power. The prolonged stock market correction and a less promising outlook for the property market could dampen consumer sentiment. At the same time, deteriorating business conditions are unlikely to stimulate investment demand, though the negative interest rate environment should lend some support to investment activities buffering a sharp deceleration.

Hong Kong economic growth is likely to decelerate sharply in the second half and possibly stay low for a greater part of 2009. We have thus revised downward the real GDP growth for the full year of 2008 to 4.3% from an initial estimate of 5%, that implies real GDP growth could slow to 3% in the second half, from 5.8% in the first half. Growth for 2009 is likely to go lower to 3.3%.