Second quarter GDP up 4.2%

The GDP forecast for 2008 as a whole is 4% to 5%.

Hong Kong’s economy grew moderately in the second quarter of 2008 with GDP rising 4.2%, after 7.3% growth in the first quarter, according to a Hong Kong Special Administrative Region Government report released August 15.

Government Economist K.C. Kwok said the moderation after a prolonged period of robust economic expansion indicates slowing growth in advanced economies and lingering financial market turbulence have dragged down Asia’s economic growth.

Merchandise exports decreased in June amid the increasingly challenging external environment, but grew moderately for the second quarter as a whole. Exports of services grew notably in the second quarter, yet the performance was not as sanguine as in previous quarters. There was further expansion in offshore trade and inbound tourism, but the impact on financial service activities due to ongoing turbulence in the global financial markets became more evident.

Domestic demand also showed slower growth in the second quarter. The growth of consumption spending moderated after a long period of exceptionally strong performance. While the stable labor market remained a supportive factor, the stock market correction, rising inflation and dimmer global economic prospects dented consumer sentiments. Investment spending expanded further despite the high base of comparison in the same quarter of 2007.  The latest business survey results suggest large business establishments were still generally positive about near-term business prospects.

Labor market conditions remained firm in the second quarter. The seasonally adjusted unemployment rate stayed at 3.3%, the lowest of the past decade, and the underemployment rate was stable at 1.9%.  Labor earnings and wages were on the rise.

Inflationary pressure continued to trend upward in the second quarter, with headline consumer price inflation rising to 5.7%. The surge in food prices contributed significantly to the recent pick-up in consumer price inflation. Pressure from the demand side after a prolonged period of economic expansion was also reflected in the faster increases in private housing rentals and, to a lesser extent, prices for other goods and services. Underlying consumer price inflation, after netting out the effects of one-off policy measures, also stood at 5.7%, the same as its headline counterpart in the second quarter. This was because the alleviation effect of the rates concession in the second quarter this year was offset by the similar measure implemented in the same quarter in 2007.

The external environment facing Hong Kong will be increasingly challenging, owing to the expected moderation in global economic growth, lingering global financial turbulence and the negative effect on demand in Hong Kong’s major markets because of high commodity prices. Rising inflation among Asian economies is also posing a greater threat to economic prospects in the region. The macroeconomic adjustment measures in the Mainland economy also need to be watched closely.

Domestic demand is expected to slow in the remaining months of the year, as growth in the external sector recedes. But stable labor market conditions should continue to provide support to local consumption. With business confidence remaining generally positive, there should also be further growth in investment spending.

On the whole, Hong Kong’s economy is expected to grow moderately the rest of 2008, at a rate more in line with the trend growth rate over the past decade. Taking into account the notable growth of 5.8% in the first half of the year, the GDP forecast for 2008 as a whole is unchanged at 4% to 5%.

Global food prices and international oil prices, while showing some signs of stabilization lately, remain elevated. Thus, external inflationary pressure will continue to be felt in coming months. Domestically generated inflationary pressure may also become more evident, especially in private housing rentals, after a prolonged period of rapid economic expansion. Improvements in labor productivity and the expected moderation in the rate of economic growth in the period ahead should provide some alleviating effect.  

Taking into account the faster-than-expected increase in food prices in the first half of the year, the forecast rate of increase in the underlying Composite CPI for 2008 was revised from 4.5% to 5.5%. Nevertheless, the relief measures announced in the 2008-09 Budget and by Chief Executive Donald Tsang in mid-July will help to lower headline inflation in the latter part of the year. The forecast headline inflation rate for 2008 is now 4.2%.