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| Hong Kong’s economy grew 7.1% in the first quarter. |
Hong Kong’s economy continued to expand strongly in the first quarter of 2008, despite the growing adversities in the external environment. With real GDP growing by 7.1%, the economy extended the run of distinctly above-trend growth to 18 quarters, according to the First Quarter Economic Report 2008, released May 16 by the Hong Kong Special Administrative Region Government.
Hong Kong Government Economist Kwok Kwok-chuen described the economic situation in the first quarter of 2008 and provided the latest GDP and price forecasts for the year.
The external sector remained resilient to the increasingly challenging environment in the first quarter, which was characterized by a weakening U.S. economy and financial market turbulence. Total exports of goods attained 8.3% growth in the first quarter, supported by the vibrant performance of mainland China and other emerging economies and the further expansion of the EU market. Exports of services also stayed strong in the first quarter, growing rapidly by 10.8% on the back of a continued surge in financial services, as well as notable growth in offshore trade and inbound tourism.
Domestically, both consumer and investor confidence remained strong in the first quarter, thus maintaining domestic demand’s key role in supporting overall economic growth. Private consumption expenditure grew 7.9%, underpinned by the firm labor market conditions and rising incomes. Overall investment held up well, expanding by 8.9% with a rebound in building and construction activity. However, amidst dimmer global economic prospects, the local stock market experienced further consolidation in the first quarter and the housing market turned less hectic.
Labor market conditions continued to be firm in the first quarter. The seasonally adjusted unemployment rate remained stable at 3.4%, and the underemployment rate fell further to a 10-year low of 1.9%. Labor earnings and wages were on the rise.
Consumer price inflation picked up in the first quarter, mostly due to the surge in food prices amidst the global food inflation. The sustained above-trend economic growth also added to inflationary pressure from the demand side. Headline Composite Consumer Price Index (CPI) inflation averaged at 4.6% in the first quarter. After netting out the one-off effects of the rates concession this year and the public housing rental waiver last year, underlying Composite CPI inflation in the first quarter was 4.9%.
Looking ahead, the external environment will remain uncertain and challenging. The U.S. economy will continue to be weak with the effects of the housing market downturn spreading into the wider economy, while global financial markets are likely to remain unsettled. Economic activities in other major advanced economies also have shown signs of deceleration.
Nevertheless, the growth momentum in the emerging and developing economies, including the Mainland economy, is expected to remain vibrant, although there should unavoidably be some mild moderation in growth due to the weaker demand from the advanced economies. This should provide some cushioning effect to the impact of the economic slowdown in the developed world on Hong Kong in the coming quarters.
Domestic demand is expected to grow solidly further and remain a key driver in economic growth going forward. Firm labor market conditions and rising incomes should continue to give strength to private consumption. As business confidence holds up and interest rates remain low, there should also be further growth in investment spending in the rest of the year.
Overall, given the uncertainties prevailing in the external environment and dimmer global economic prospects, the GDP forecast at 4-5% as announced in the Budget round in February remains unchanged. With the strong GDP growth in the first quarter, and barring any abrupt external shocks, the GDP growth in 2008 is expected to be close to the upper end of the range forecast.
The inflation outlook is uncertain and will hinge on the movements of food prices in the international markets in the rest of the year, which can be expected to be volatile. Apart from global food prices, the elevated international oil prices, the exchange rate movements as well as the strength of the local economy are likely to continue to exert inflationary pressure. The sustained increase in labor productivity will provide some offsetting effect. In view of the high degree of uncertainties in the external environment, the forecast rate of increase in the underlying Composite CPI for 2008 is maintained at 4.5%. The corresponding forecast headline inflation rate is also kept unchanged at 3.4%. The risks to these forecasts are on the upside. The government will review the inflation forecast as more incoming data become available.
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