The Government released today (August 17) the Half-yearly Economic Report 2007, together with the preliminary figures on Gross Domestic Product for the second quarter of 2007.

     The Government Economist, Mr Kwok Kwok-chuen, described the economic situation in the second quarter of 2007 and provided the latest GDP and price forecasts for the year.

MAIN POINTS

* The Hong Kong economy expanded briskly in the second quarter of 2007, with GDP accelerating to a 6.9% growth in real terms over a year earlier, up from a revised 5.7% in the first quarter.  The economic upturn continued to be broad-based and distinctly above trend.

* Externally, merchandise exports sustained another quarter of strong performance, growing by 11.3% in real terms in the second quarter.  While exports to the Mainland stayed vibrant on the back of a buoyant economy, those to the EU and Japan also showed faster growth, thereby offsetting the softness of the US market.  Further weakening of the US dollar also helped.  

* Financial services recorded spectacular performance while many business and professional services held up well.  Meanwhile, exports of services continued to show distinct growth, rising by 10.9% in real terms in the second quarter, underpinned by the surge in offshore trade, buoyant financial market activities and sustained expansion of inbound tourism.

* Domestically, private consumption expenditure rose markedly further by 6.6% in real terms in the second quarter, supported by rising income, better job prospects and improved financial positions of households.  Overall investment spending picked up to a strong 11.1% growth in real terms in the second quarter.  Investment in equipment and machinery re-accelerated to double-digit growth amidst the strong business confidence, while construction and building activity saw a notable rebound albeit from a low base.

* The labour market improved further in the second quarter, with the seasonally adjusted unemployment rate edging down to 4.2% in the second quarter, the lowest since mid-1998.  Wages and earnings continued to rise, while job vacancies surged to a post-1997 high in March 2007.

* The global economic environment is still largely positive.   However, the weakness of the US economy arising from a prolonged correction in the housing market and the turmoil arising from the sub-prime mortgages will remain a concern.  This, coupled with the tightening in credit conditions in many financial markets, will constitute the key source of uncertainty going forward. The external environment will also be affected by the movements of exchange rates as well as the macroeconomic adjustment measures in the Mainland.  Yet there are also a number of favourable developments, including the continued vibrant growth of the Mainland and other emerging economies, the sustained economic expansion in Europe and Japan, as well as the fairly strong performance of other Asian economies.  

* Domestic demand has gathered strong momentum in recent quarters and assumed an important role in driving the economy forward.  An improving labour market and strong consumer confidence should continue to support private consumption spending.  Investment spending should also hold up well, in the face of the brisk pace of business expansion, sustained corporate profit growth, and new business opportunities emanating from the economic integration between Hong Kong and the Mainland.

* Taking into account the better-than-expected outturn of a 6.3% GDP growth in the first half of 2007 and also the range of uncertainties prevailing in the external environment, the forecast GDP growth for 2007 as a whole is revised upward from 4.5-5.5% to 5-6%.  Indeed, barring any abrupt adverse changes in the external environment, the economy is set for further solid growth in the second half of the year.  

* As to the inflation outlook, higher food prices, the renminbi appreciation and recent weakness of the US dollar would continue to exert cost pressure from the external front.  Nevertheless, the sustained rapid increase in labour productivity and continued expansion in productive capacity on the supply side would provide an offset. Moreover, various one-off factors including the rates concession for two quarters, the recent public housing rental cut, and the implementation of the Pre-primary Education Voucher Scheme would also help keep the headline inflation at a moderate level in the rest of the year.  With the actual outturn of consumer price inflation so far largely in line with expectations (1.5% for the first half of 2007), the forecast rate of increase in the Composite CPI for 2007 as a whole is maintained at 1.5%.

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DETAIL

GDP

     According to the preliminary figure on the Gross Domestic Product (GDP) released today by the Census and Statistics Department, GDP rose by 6.9% in real terms in the second quarter of 2007 over a year earlier, marking the 15th consecutive quarter of distinctly above-trend growth.  This was also faster than the revised 5.7% growth in the preceding quarter.  Growth remained broad-based, with external trade gathering strong momentum and domestic demand continuing to display strength.  On a seasonally adjusted quarter-to-quarter comparison, GDP accelerated to a 2.0% growth in real terms in the second quarter of 2007 (Chart).  

     The latest figures on GDP and its major expenditure components up to the second quarter of 2007 are presented in Table 1. Developments in different segments of the economy in the second quarter of 2007 are described below.

External trade

     Merchandise exports registered robust growth in the second quarter of 2007, with broad-based expansion across different markets.  The Mainland market continued to be the key growth driver, given its own vibrant trade flows and strong domestic demand.  Exports to the EU and Japan also showed faster growth, thereby offsetting the softness of the US market.  Further weakening of the US dollar also contributed to export competitiveness.  Total exports of goods went up strongly by 11.3% in real terms in the second quarter over a year earlier.  On a seasonally adjusted quarter-to-quarter comparison, total exports of goods expanded by 2.0% in real terms in the second quarter of 2007.  

     Exports of services grew distinctly, by 10.9% in real terms in the second quarter of 2007 over a year earlier, mainly propelled by service exports relating to offshore trade as well as by exports of financial services given the buoyant financial market activities.  Service exports relating to inbound tourism also saw further notable growth along with the pick-up in the number of incoming visitors in the quarter.  On a seasonally adjusted quarter-to-quarter comparison, exports of services rose notably by 3.9% in the second quarter of 2007.

Domestic sector

     The robust external trade was well matched by the fairly strong performance of domestic demand.  Local consumer sentiment was upbeat in the second quarter, backed by rising labour income, better job prospects and buoyancy of the stock market.  Private consumption expenditure (PCE) accelerated to a strong 6.6% growth in real terms in the second quarter of 2007 over a year earlier.   On a seasonally adjusted quarter-to-quarter comparison, private consumption expenditure likewise increased distinctly, by 2.8% in real terms in the second quarter.

     Overall investment spending picked up to a strong 11.1% growth in real terms in the second quarter of 2007.  Machinery and equipment investment continued to be a major driving force of overall investment growth, while stronger private sector construction activities led to a rebound in overall building and construction expenditure, albeit from a low base.    Meanwhile, the results of the latest Quarterly Business Tendency Survey continued to indicate strong business confidence.  

The labour sector

     The labour market continued to improve in the second quarter of 2007.  Total employment hit record high, and in tandem the seasonally adjusted unemployment rate edged down further to 4.2% in the second quarter, the lowest since mid-1998. The total number of job vacancies in the corporate sector surged to a post-1997 high in March 2007, while wages and earnings continued to rise.

Prices

     Consumer price inflation remained mild.  The year-on-year rate of increase in Composite Consumer Price Index (CCPI) eased to 1.3% in the second quarter of 2007, down from the 1.7% rise in the first quarter.  This was mainly attributable to the rates concession for two quarters, which would last until September this year.  Discounting the effect of the rates concession, the underlying inflation rate was still moderate, at 2.4% year-on-year in the second quarter.  This was notwithstanding the increased imported inflation particularly in foodstuffs in addition to the exchange rate effect as a result of the weakness of the Hong Kong dollar and the appreciation of the renminbi.  The GDP deflator continued to increase slightly, by 0.7% in the second quarter, along with the improvement in terms of trade.

Latest GDP and price forecasts for 2007

     The global economic environment is still largely positive.   However, the weakness of the US economy is expected to continue in the coming quarters, given the prolonged correction in its housing market and the recent financial market turmoil arising from the sub-prime mortgages.  Uncertainties arising from the tightening in credit conditions in many financial markets and the increase in financial market risks will continue for some time.  The external environment will also be affected by the movements of exchange rates as well as the macroeconomic adjustment measures in the Mainland.  Yet there are also a number of favourable developments, including the continued vibrant growth of the Mainland and other emerging economies, the sustained economic expansion in Europe and Japan, as well as the fairly strong performance of other Asian economies.  

     Domestic demand has gathered strong momentum in recent quarters and assumed an important role in driving the economy forward.  An improving labour market and strong consumer confidence should continue to support private consumption spending.  Investment spending should also hold up well, in the face of the brisk pace of business expansion, sustained corporate profit growth, and new business opportunities emanating from the economic integration between Hong Kong and the Mainland.

     Taking into account the better-than-expected outturn of a 6.3% GDP growth in the first half of 2007 and also the range of uncertainties prevailing in the external environment, the forecast GDP growth for 2007 as a whole is revised upward from 4.5-5.5% to 5-6%.  Indeed, barring any abrupt adverse changes in the external environment, the economy is set for further solid growth in the second half of the year (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.
 
     As to the inflation outlook, higher food prices, the renminbi appreciation and recent weakness of the US dollar would continue to exert cost pressure from the external front.  Nevertheless, the sustained rapid increase in labour productivity and continued expansion in productive capacity on the supply side would provide an offset. Moreover, various one-off factors including the rates concession for two quarters, the recent public housing rental cut, and the implementation of the Pre-primary Education Voucher Scheme would also help keep the headline inflation at a moderate level in the rest of the year.  With the actual outturn of consumer price inflation so far largely in line with expectations, the forecast rate of increase in the Composite CPI for 2007 as a whole is maintained at 1.5%.   As to the GDP deflator, in view of its recent mild rebound along with the improvement in terms of trade, the forecast rate of increase for 2007 as a whole is revised slightly upward from -0.5% to 0.5%.

(The Half-yearly Economic Report 2007 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 $69 per copy (15% discount offered if purchased on-line), with a postage charge.)

(The GDP figures up to the second quarter of 2007 are published in the Report of the Gross Domestic Product, Second Quarter 2007.  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 Unit of ISD at 2537 1910.  The hard copy of the report is available for sale at $47 per copy (15% discount offered if purchased on-line), with a postage charge.)

Ends/Friday, August 17, 2007
Issued at HKT 16:32

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