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Global and Regional Economic Environment
8. Regarding the global and regional economic environment, the sub-prime mortgage problem and the credit crunch triggered by the US housing market correction has resulted in a noticeable slowdown in the US economy and created global financial turbulence. The impact of the sub-prime mortgage problem on financial institutions and investors, the losses resulting from it, and the negative effect it is having on the global economy all have yet to fully surface.
9. The present credit crisis impacts mainly on the US and Europe. Its direct impact on Hong Kong and Asia has so far been limited. Overall though, the economic performance of Asia and other emerging markets remains strong. These economies have become major pillars of global economic growth. The robust economic growth in the Mainland and in India is especially noteworthy.
10. However, the risk of overheating has emerged in the Mainland economy. Our nation has to step up macroeconomic adjustment and adopt a tight monetary policy as well as other measures to curb inflation and raise economic efficiency. In the short term, such measures will have a bearing on Hong Kongˇ¦s economy as well as a direct impact on many investors.
11. The global trend of rising inflation deserves our attention. Apart from surging food prices, energy and commodity prices remain persistently high. As food supply in the world market will take some time to increase, it is likely that there will still be upward pressure on the prices of foodstuffs in the short term.
12. Taking all these factors into consideration, Hong Kong is now faced with the risk of global economic slowdown coupled with rising inflation. There are also rising protectionist sentiments. We should be aware of the possibility that the situation might deteriorate in the near future and that the fallout may be prolonged.
Economic Outlook for 2008
13. I am cautiously optimistic about Hong Kong's economic prospects for 2008. While the slowdown in growth of advanced economies in Europe and the US will have some impact on the economies of emerging markets and the Mainland, the sustained rapid economic growth of the Mainland and its increasingly intensified economic integration with Hong Kong will greatly promote our economic development and cushion the impact of the slowdown on Hong Kong. The economic fundamentals in Asia remain strong, which will help to improve our external trade performance and consolidate our position as Asia's world city. Local interest rate cuts, following those in the US, will also stimulate economic growth.
14. Moreover, Hong Kong's economy has staged a strong recovery over the past few years, with a marked improvement in employment and a rise in asset prices. The financial position of most enterprises and individuals has improved, and consumer sentiment and investor confidence are strong. Domestic demand will very likely remain a major driving force of economic growth in 2008.
15. Taking all these factors into account, and in the absence of unexpected serious incidents or major external shocks, Hong Kongˇ¦s economy will continue to record solid growth in 2008. I forecast GDP to increase by four to five per cent, lower than that in the past four years but still higher than the average trend growth rate for the past ten years. I expect that the unemployment rate will remain at a relatively low level.
16. I am optimistic about our economic prospects over the medium term. Hong Kong will continue to move up the value chain in services provision and will intensify economic integration with the Mainland, consolidating its role as a financial, business, trading, services and tourism hub of the region. Furthermore, we will continue to tap new opportunities in emerging markets. I estimate that the annual average growth rate will be 4.5 per cent in real terms for the period 2009 to 2012.
17. As regards inflation, given continued economic expansion and high global commodity prices, the underlying inflation rate in 2008 is estimated to rise to 4.5 per cent, while the inflation rate forecast will average four per cent over the following four years. I forecast that upon implementation of the various one-off measures proposed in this Budget, the inflation rate will fall to 3.4 per cent in 2008.
18. I realise that inflation has increased the burden on citizens. Rising food prices, while affecting everyone, hit those with low incomes hardest. I hope that the measures proposed in this Budget will help to relieve the burden of citizens, especially the disadvantaged, so that all can share the fruits of our economic growth.
(To be continued)
Ends/Wednesday, February 27, 2008
Issued at HKT 11:13
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