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The Government released today (August 22) the Half-yearly Economic Report 2006, together with the preliminary figures on Gross Domestic Product for the second quarter of 2006.
The Government Economist, Mr K C Kwok, described the economic situation in the second quarter of 2006 and provided the latest GDP and price forecasts for the year.
MAIN POINTS
* The Hong Kong economy, after an exceptionally strong growth of 8.0% in the first quarter, grew by 5.2% in the second quarter of 2006 (former figure revised from the earlier estimate of 8.2%). This marked the eleventh consecutive quarter that GDP growth exceeded the average trend growth of 3.9% in the past ten years.
* Yet when compared with the first quarter, external trade was less sanguine. Merchandise exports, having attained continuous strong growth over the past three years, grew more moderately in the second quarter, by 6.4% in real terms over a year earlier. The slackening in export momentum was most apparent in the US market, upon the somewhat weaker consumer demand there. Exports to most other markets also showed different extents of moderation, partly due to the feed-through of a stronger US dollar in the earlier period. Yet the vibrant Mainland economy has helped to cushion the impact of weaker performance in other markets. Also, exports of services still maintained notable growth momentum, up 8.6% in real terms in the second quarter, bolstered by continued distinct growth in offshore trade and still vibrant inbound tourism.
* Against a weaker export performance, however, domestic demand continued to hold up well, thereby providing the key driver of economic growth in the second quarter. Private consumption expenditure picked up further to a 5.0% growth in real terms in the second quarter, alongside improving employment conditions. This improvement occurred even amidst the large volatilities in the stock market in May and June caused by an uncertain interest rate outlook.
* Overall investment expenditure grew by 4.3% in real terms in the second quarter, with the continued surge in expenditure on machinery and equipment, at 12.8%, more than offsetting the decline at 6.4% in building and construction expenditure. The former was a clear reflection of strong investor confidence on the back of expanding business activity.
* The above-trend economic growth led to a further improvement in the labour market, with the seasonally adjusted unemployment rate edging down to 5.0% in the second quarter and further to 4.9% in May-July 2006, the lowest in nearly 5 years. Compared with the trough in 2003, some 263 000 additional jobs have been created; and the number of long-term unemployed has also come down markedly by nearly half. The unemployment rate for lower-skilled workers saw further improvement, while that for professional and managerial employees has fallen back to around 2%. Wages and earnings remained on the rise, and job vacancies continued to surge, reaching its highest since September 1997.
* The outlook for the rest of the year depends on how the various downside risks from the external front, including most notably, weaker US growth and high oil price, would play out to affect Hong Kong's external trade. Yet at this present juncture, it is believed that the external environment would remain largely positive in the second half of the year. Although the US market has shown some signs of moderation lately, the recent pause in the US interest rate up-cycle, the sustained brisk expansion of the Mainland economy, and the current upturn in Europe and Japan are all positive factors which would help to underpin Hong Kong's export performance going forward. The further weakening of the US dollar lately is another supportive factor. On balance, total exports are still poised for further growth in the second half of the year, albeit possibly not as fast as previously.
* Domestic demand can be expected to remain resilient and play an even more prominent role in driving economic growth in the rest of the year. Consumer spending looks set to grow solidly further in the near term, on the back of rising household incomes and better job prospects, aided further by the positive wealth effect from the recent stock market boom. The pause in the US interest rate up-cycle will add further support to households' willingness to spend. Investment in machinery and equipment also seems likely to increase briskly further, in tandem with rising corporate earnings and the expanding business. But the sluggishness in construction might continue to hold back the pace of upturn in overall investment.
* With the resilience in domestic demand and with the expected further growth in trade, the economic outlook for the rest of the year is for a further expansion closer to the past trend growth rate. That the economy would progressively move from a high growth track back to a growth pace more in line with its past trend during this year actually accords well with earlier expectations. Given the outturn so far and with the expected further solid expansion in the second half, for 2006 as a whole, the Hong Kong economy should easily attain the forecast growth range of 4-5% as put out earlier. On the whole, the May round forecast of a 4-5% GDP growth for 2006 is still applicable. Indeed, barring any abrupt adverse changes in the external environment, GDP growth for the year as a whole is likely to be close to 5%, the upper end of the range forecast.
* Consumer price inflation, though notching up to 2.0% in the second quarter, remained benign. Looking ahead, overall inflationary pressures are likely to stay rather moderate, being kept down by rising productivity and capacity expansion from hefty business investment. With the actual outturn of consumer price inflation so far broadly in line with the earlier expectations, the forecast rate of increase in the Composite CPI for 2006 as a whole is kept unchanged at 2%. As to the forecast rate of change in the GDP deflator, it is revised slightly downwards to 0% from the earlier forecast of 0.5%, in view of the persistent fall in the terms of trade caused by higher oil prices.
DETAIL
GDP
According to the preliminary figure on the Gross Domestic Product (GDP) released today by the Census and Statistics Department, GDP grew by 5.2% in real terms in the second quarter of 2006 over a year earlier, following an exceptionally strong 8.0% growth (revised down from 8.2% in the earlier release) in the first quarter and a 7.3% growth in 2005. This marked the eleventh straight quarter of above-trend growth for the Hong Kong economy. On a seasonally adjusted quarter-to-quarter comparison, GDP showed virtually zero growth in real terms in the second quarter of 2006. This came after a strong 2.2% increase in the first quarter and eleven consecutive quarters of sustained expansion (Chart).
2. The latest figures on GDP and its major expenditure components up to the second quarter of 2006 are presented in Table 1. Developments in different segments of the economy in the second quarter of 2006 are described below.
External trade
3. External trade was less sanguine in the second quarter compared with the exceptionally strong performance in the first quarter. Merchandise exports to most of the major markets slowed. Exports to the United States fell back in the quarter amidst weaker consumer demand there. Exports to Japan also slowed down considerably, conceivably affected by the notable depreciation of the yen over the past year or so. Exports to the EU, though still growing, were also much less robust than in the preceding quarters, again partly due to the feed-through of the weaker euro in the earlier quarters. Yet with the Mainland economy growing at a brisk pace, exports to the Mainland continued to show double-digit growth, thereby rendering some cushion to the weaker performance in other major overseas markets. Overall, total exports of goods grew by 6.4% in real terms in the second quarter of 2006 over a year earlier, following a 14.4% increase in the preceding quarter. On a seasonally adjusted quarter-to-quarter comparison, total exports of goods fell by 1.1% in real terms in the second quarter, after a 2.2% increase in the preceding quarter.
4. Exports of services, in contrast, still held up well in the second quarter, up 8.6% in real terms, after an 8.9% growth in the first quarter, as offshore trade and transportation service exports were bolstered by Mainland's vibrant trade flows, and as inbound tourism continued to thrive. On a seasonally adjusted quarter-to-quarter comparison, exports of services rose by 1.8% in the second quarter, faster than the 0.8% increase in the preceding quarter.
Domestic sector
5. The role of domestic demand in driving overall economic growth has become more prominent in the second quarter. On the back of improving employment conditions and job prospects, private consumption expenditure picked up further to a 5.0% growth in the second quarter, up from the 4.5% growth in the preceding quarter. This was notwithstanding the local stock market correction in May and June caused by uncertainties about future interest rate movements. On a seasonally adjusted quarter-to-quarter comparison, private consumption expenditure went up by 1.0% in real terms in the second quarter, following a 1.6% increase in the first quarter.
6. Overall investment spending in terms of the gross domestic fixed capital formation grew further by 4.3% in real terms in the second quarter over a year earlier. Expenditure on machinery and equipment, which surged by 12.8%, continued to provide the major impetus to overall investment growth. Clearly, the business sector has seen the need to increase productivity and expand productive capacity to cater for the envisaged growth in business opportunities. This was also consistent with the strong business confidence prevailing in the economy as evidenced from the latest round of the Business Tendency Survey. Activity in the construction sector, however, remained subdued, falling by 6.4%.
The labour sector
7. The labour market improved further in the second quarter. The seasonally adjusted unemployment rate fell to 5.0% in the second quarter and further to 4.9% in May - July, the lowest in nearly five years. Since the trough of 2003, some 263 000 additional jobs were created, leading to improvement in the employment conditions for workers at different skill levels. Meanwhile, the number of long-term unemployed persons continued to decline, and by now it has come down by around half. Also, the total number of job vacancies in the private sector rose markedly further in March 2006 over a year ago, and labour incomes remained on the rise.
Prices
8. Consumer price inflation continued to inch up along with the further economic expansion. The Composite Consumer Price Index rose by 2.0% in the second quarter of 2006 over a year earlier, up from the 1.6% increase in the preceding quarter. (In July, the CCPI inflation was 2.3%, giving an average of 1.9% for the first seven months taken together.) Although the feed-through of rising private housing rentals and soaring oil prices was increasingly felt, in overall terms inflationary pressures were still moderate, being mitigated by rising productivity and generally soft import prices. On a seasonally adjusted quarter-to-quarter comparison, the Composite CPI showed a 0.8% increase in the second quarter, following a 0.4% increase in the first quarter. As to the GDP deflator, it continued to decrease marginally by 0.1% in the second quarter over a year earlier, after a similar decline in the preceding quarter. This was entirely dragged by the fall in the terms of trade resulting from the faster increase in import prices, in turn due to higher oil prices.
Latest GDP and price forecasts for 2006
9. After 11 quarters of above-trend growth, the economic outlook for the rest of the year is for a further expansion closer to the past trend growth rate. That the economy would progressively move from a high growth track back to a growth pace more in line with its past trend during the year actually accords well with earlier expectations.
10. Externally, total exports are still poised for further growth in the period ahead, with the support from the vibrant Mainland economy, continued economic upturn in Europe and Japan, and also the renewed weakening of the US dollar lately. But the export growth momentum going forward is unlikely to be as strong as in the past two years when global economic growth was amongst the strongest in 30 years.
11. Although external trade may not grow as fast, domestic demand is likely to stay firm to render the key impetus to overall economic growth in the rest of the year. Consumer spending will continue to be underpinned by rising household incomes and better job prospects, especially with the positive wealth effect from the recent stock market boom and also the pause in the US interest rate up-cycle. Investment in machinery and equipment looks set to surge further, in tandem with rising corporate earnings and the expanding business. But the sluggishness in construction will continue to hold back the pace of upturn in overall investment.
12. Having regard to the strong GDP outturn so far and the expected further expansion at a solid pace in the second half, for 2006 as a whole the Hong Kong economy should easily attain the forecast GDP growth range of 4-5% put out earlier. On the whole, the earlier range forecast of 4-5% GDP growth for 2006 as a whole is still applicable. Indeed, barring any abrupt adverse changes in the external environment, it is likely that, for the year as a whole, GDP growth would be close to 5%, the upper end of the range forecast (Table 2). For comparison, the forecasts of Hong Kong's GDP growth by a selection of international organisations and local analysts are summarised in Table 3.
13. As to the outlook for consumer price inflation, it should remain at a rather moderate level through to the end of 2006, though possibly with some further notching up in tandem with the further economic expansion. With the actual outturn of consumer price inflation so far broadly in line with the earlier expectations, the forecast rate of increase in the Composite CPI for 2006 as a whole is kept unchanged at 2%. As to the forecast rate of change in the GDP deflator for 2006 as a whole, it is revised slightly downwards to 0% from the earlier forecast of 0.5%, due to the persistent fall in the terms of trade caused by higher oil prices.
(The Half-yearly Economic Report 2006 is now available. Users can download the publication free of charge at http://www.statisticalbookstore.gov.hk or http://www.info.gov.hk/hkecon/report. Print version of the report can also be purchased on-line, or by calling the Publications Sales Unit of ISD at 2537 1910. The hard copy of the report is available for sale at $68 per copy (15% discount offered if purchased on-line), yet with a postage charge.)
(The GDP figures up to the second quarter of 2006 are published in the Report of the Gross Domestic Product, Second Quarter 2006. Users can download the publication free of charge at http://www.statisticalbookstore.gov.hk. Print version of the report can also be purchased on-line, or by calling the Publications Sales Section of ISD at 2537 1910. The hard copy of the report is available for sale at $36 per copy (15% discount offered if purchased on-line), yet with a postage charge.)
Ends/Tuesday, August 22, 2006
Issued at HKT 16:30
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