Hong Kong Financial Secretary John C. Tsang (right) held a news conference on August 13 to announce the "Economic Situation in the Second Quarter of 2010 and Latest GDP and Price Forecasts for 2010." Also attending the press conference was Government Economist Helen Chan.

Hong Kong’s second-quarter GDP rose 6.5% compared with a year earlier, following a growth of 8% in the first quarter. On a seasonally adjusted quarter-to-quarter comparison, real GDP expanded by 1.4%, according to the Half-yearly Economic Report 2010 released by the Hong Kong Special Administrative Region Government on August 13. The gains mark the fifth consecutive quarter of expansion.

Noting the latest economic figures, Hong Kong Financial Secretary John C. Tsang said, “The economic statistics that we have been receiving of late are encouraging, but we must not take our eyes off the ball. We are at a crucial juncture of our economic recovery, and it is important that we prepare now for the challenges ahead.

Forecast

“Overall, I now forecast real economic growth for 2010 of between 5% and 6%. This is up by 1 percentage point from the 4% to 5% growth that I set out in my budget in February,” he said.

The Financial Secretary noted the uncertain external environment, pointing out that recent statistics indicate the pace of economic recovery in the United States is slowing down and it is unclear whether the U.S. economy can maintain growth momentum when the effects of various governmental stimulus measures fade away.

“In Europe, the sovereign debt crisis is not yet over.  Austerity measures adopted by various European governments could weigh on our economic recovery,” Mr. Tsang said. “So, we must remain vigilant as the crisis plays out.

“The fragile external environment means that the abundant supply of global liquidity floating around an ultra-low interest rate environment is going to remain longer than earlier expected. This will entail higher risk of an asset bubble in Asia. We must be fully prepared and take precautionary measures to avoid systemic risks that might disrupt our economic recovery.”

Mr. Tsang said the four measures — increasing supply, curbing property speculation, ensuring transparency and preventing excessive expansion in mortgage lending — introduced in his Budget to ensure healthy and stable development in the territory’s property market are taking effect. Due to extraordinary external factors, however, property prices have continued to rise.

After balancing the various factors, Mr. Tsang announced the introduction of additional measures to control the potential risks in the property sector.

In this regard, the government will increase land supply for housing/residential developments and step up efforts to curb speculative activities in the property market.

In parallel, the Hong Kong Monetary Authority also announced additional measures, effective immediately, to prevent excessive expansion in mortgage lending and to ensure that the risk management practices adopted by banks in granting residential mortgage loans will remain prudent and appropriate.

Mr. Tsang pointed out that a series of measures to enhance the transparency of property information and transactions have been introduced and said that the government will monitor the implementation of these measures closely. He does not rule out the possibility of further measures should that prove necessary.

“We remain determined in maintaining a strong economic recovery from the global financial crisis and reducing the risk of a bubble forming in the property market,” Mr. Tsang said.

The main points of the economic situation in the second quarter of 2010 and the latest GDP and price forecasts for the year are set out below.

Merchandise exports

Merchandise exports remained vibrant in the second quarter, expanding by 20.1% in real terms compared with a year earlier, propelled by the strong growth in many Asian markets and the further recovery in import demand in the United States. The European markets continued to lag behind the others, although the sovereign debt problem in Europe had not yet posed a significant drag on global trade flows.

Exports of services likewise maintained strong momentum, up 16.9% year-on-year in real terms in the second quarter. Inbound tourism continued to benefit from the surge in mainland China visitors and the recovery in regional markets. Exports of trade-related services were buoyant, thanks mainly to the thriving intra-regional trade flows, which in turn rendered firm support to exports of transportation services. 

Exports of business services picked up strongly on vibrant commercial activities, but exports of financial services grew only moderately, as the European sovereign debt problem dampened market sentiment during the quarter.

Private consumption

The domestic sector stayed resilient in the second quarter. Private consumption expenditure rose by 4.6% year-on-year in real terms, thanks to a general improvement in the overall economic situation and incomes. Overall investment spending experienced a distinct 15.2% growth. Construction activity was boosted by further marked growth in public sector works, while machinery and equipment acquisition also maintained strong momentum.

Labor market

The performance of the labor market was somewhat mixed: While the underemployment situation improved further, the seasonally adjusted unemployment rate rose slightly to 4.6% in the second quarter. The latter, when matched against the concurrent rise in job vacancies, indicates that the rise in unemployment was in large part due to frictional factors, as more workers were in search of employment opportunities with better terms and conditions.

The local stock market retreated in April and May, along with other major overseas stock markets, in the face of the sovereign debt problem in Europe, before stabilizing somewhat in June. The local property market also turned slightly quieter in May, before picking up again in June.

The global economy remained on track to recovery in the second quarter. Asia continued to take the lead, with the Mainland and many other Asian economies growing robustly. However, the outlook for the external environment has turned more uncertain as the sovereign debt problem in Europe — which led many European economies to implement austerity measures — posed downside risks to the global recovery. Recent indications also suggest that the growth momentum in the United States has weakened. Given these developments, it is likely that Hong Kong's year-on-year export growth may experience some deceleration in the second half of the year.

Local consumer sentiment has remained firm thus far. The results of the latest Quarterly Business Tendency Survey conducted in June and early July also indicates that large enterprises are still positive on the outlook, and that their intention to hire new hands has been further strengthened. In addition, the sustained high level of public sector construction work will render further support to domestic demand.   

Inflationary pressure climbed moderately in the second quarter amid the sustained economic revival and higher import prices.  Underlying consumer price inflation grew to 1.5% in the second quarter from 0.8% in the first quarter, and may edge up further in the coming months, as the reflationary process proceeds and as import prices rise further. Nevertheless, the sustained productivity growth in the economy should provide a useful offset to the domestic cost pressures.

With the developments on the price front so far in line with expectations, the forecast rate of the underlying consumer price inflation in 2010 as a whole is maintained at 1.5%. The corresponding forecast rate of the headline consumer price inflation is also kept unchanged at 2.3%.