GDP Forecast Revised Downwards

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May 15, 2009 - The global financial crisis and the ensuing severe recession continued to weigh heavily on the Hong Kong economy. Following a contraction of 2.6% in the fourth quarter of 2008, GDP registered a sharp year-on-year decline of 7.8% in real terms in the first quarter of 2009.

This marked the largest decline since the third quarter of 1998 when the economy was severely battered by the Asian Financial Crisis, according to the First Quarter Economic Report 2009 released by the Hong Kong Special Administrative Region Government, together with the preliminary figures on Gross Domestic Product for the first quarter of 2009.

With the pace of deterioration in global demand markedly worse than earlier expectations thereby leading to the severe contraction in Hong Kong economy in the first quarter, and taking into account the considerable mark-down in world economic outlook since the Budget round, GDP for 2009 as a whole is now forecast to contract by 5.5-6.5% in real terms, down from the forecast decline of 2-3% put out in the Budget round.

Speaking at a press conference on May 15 afternoon, Financial Secretary John Tsang said a new package of measures will be announced in a month to relieve hardship, stimulate economic activity and help people weather the financial storm.

“The new round of measures will directly benefit the community. We aim to secure funding approval before the recess of the current Legislative Council session. I will announce further details once this work is completed,” he said.

“There is no need to be overly pessimistic about the latest economic indicators. Hong Kong's financial system remains sound and our economy is in relatively good shape compared to many others. Working together I am confident we would be able to ride out the storm.”

Mr. Tsang said Hong Kong may be experiencing the worst period now and should see better performance in the second half of the year.

On the trade front, Hong Kong’s merchandise exports, like many other economies in the region, faced the double blow from sharp plunge in global demand and from an acute fall-off in intra-regional exports which were closely tied to demand in advanced economies.

Total exports of goods plummeted by 22.7% in the first quarter compared to a year earlier, the largest decline since the second quarter of 1954. Exports of services declined by 8.2%, similarly hit by the plunge in global and regional demand. Inbound tourism nevertheless stood out as the bright spot with a further solid growth, thanks to the continued growth in Mainland visitors, partly helped by the further liberalization measures under the Individual Visit Scheme.

In such a difficult and uncertain global economic climate, local sentiments were naturally depressed. In the first quarter of 2009, private consumption expenditure fell by 5.5% when set against the very high base of comparison in the same quarter of 2008. Yet the decline on a quarter-to-quarter basis actually tapered, and this reflected in part the relative improvements in the local stock and property markets during the quarter, and conceivably also the stimulus from the several rounds of packages announced since last year. Overall investment remained much in a sluggish state, down by 12.6% in the first quarter over a year earlier.

The labor market continued to adjust to the economic downturn through downsizing and wage cuts. The unemployment rate rose to 5.2% in the first quarter. As both local and external price pressures receded, consumer price inflation continued to trend down. The underlying inflation rate eased to 3.1% in the first quarter, from 5.4% in the fourth quarter of 2008.

Amid the difficult external environment, Hong Kong's exports of goods and services are likely to remain sluggish in the near term. Nevertheless, with the prospect of global contraction somewhat stabilizing after the exceptional fall-offs earlier on, Hong Kong's external trade should see some relative improvement later in the year. More importantly, the Mainland economy is poised for a return to faster growth, with the massive stimulus measures successively in place and with both export orders and production activities concurrently reviving.

Domestically, consumer spending may remain moderate going forward, but the recent rebound in the local stock and housing markets, and the distinctly low interest rates, should hopefully render support to a relatively more stable local environment. Investment however is expected to remain depressed until the local economy shows clear signs of turnaround.

The latest GDP forecast is clearly subject to an unusually large degree of uncertainty from the still evolving global financial and economic environments. The outbreak of the human swine influenza in North America has also emerged as a new source of uncertainty for both the global and Hong Kong economy. Yet the expected pick-up in the Mainland economy, the recent rebound in global stock markets, the relative improvement in economic sentiment both in US and Europe, have provided glimpse of light at the end of a long tunnel, although a strong recovery is not yet in sight.

On inflation outlook, as an integral part of cost and price adjustments in economic downturn, price pressures from both the external and domestic fronts are rapidly receding and are expected to come down further in the months ahead. Factoring in the actual outturn in the first quarter, the forecast rate of increase in the headline Composite CPI for 2009 is marked down to 1% from 1.6% in the Budget round. The corresponding forecast underlying inflation rate is revised accordingly to 0.9%, from the earlier forecast of 1.5%.