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Budget Speech by the Financial Secretary (2)

Economic Performance and Outlook

Economic Performance 2009

9. First of all, I will say a few words about our economic performance in 2009 and the economic outlook for 2010.

10. Gross Domestic Product (GDP) fell by 7.5 per cent in the first quarter of 2009.  But, as the Mainland economy returned to faster growth and the European and the US economies began to stabilise, our economy improved in the second quarter and resumed year-on-year growth of 2.6 per cent in the fourth quarter.  For 2009 as a whole, GDP fell by only 2.7 per cent.

11. Amidst the severe plunge in global trade, Hong Kong's goods exports fell by 12.6 per cent in real terms in 2009, the biggest annual drop on record.  For investment, gross domestic fixed capital formation dipped by 2.2 per cent for the whole year.  We can, however, take some comfort in the fact that consumer sentiment was not seriously affected for most of last year.  In 2009, private consumption expenditure dipped by only 0.3 per cent and actually reverted to a year-on-year increase in the latter half of the year.  Business sentiment also improved distinctly during the latter half of the year, with overall investment recording double-digit growth in the fourth quarter.

12. Employment is the Government's biggest concern.  As the economy started to recover and our measures to preserve employment proved effective, employment conditions turned better from the middle of last year, with unemployment rate coming down to 4.9 per cent lately.

13. As the costs of doing business in Hong Kong came down and the average import prices softened as a result of the global recession, the inflation rate eased from the beginning of last year.  Mild deflation was seen in the latter half of the year.  The average inflation rate for 2009 as measured by the Composite Consumer Price Index was 0.5 per cent.  Netting out the effects of the Government's one-off relief measures, the underlying inflation rate was one per cent.

Economic Outlook 2010

14. I am cautiously optimistic about Hong Kong's economic prospects for 2010.  The global economy has not yet regained its vigour.  There remain a number of uncertainties and potential pitfalls in the external environment.  While the European and the US economies have returned to positive growth, their labour markets have yet to improve and their financial systems are still impaired.  These economies may have undergone fundamental changes in their economic structures, and that will affect our future export performance.

15. It remains uncertain whether some of the economies can grow robustly after the effects of the huge stimulus measures have subsided.  If all countries and central banks were to exit from these measures at the same time, the potential shocks to the global financial and economic scenes would be a cause for concern.  Mounting protectionism is also being seen among countries.  These potential problems may put us on a bumpy recovery path in the year ahead.  As such, we have to remain vigilant against the risk of a possible relapse and prepare to maintain social and economic stability.

16. On the other hand, the return to a stronger growth in the Mainland economy may help offset the fragile recovery in overseas markets.  I forecast GDP growth of four to five per cent for the year.  The employment situation is expected to improve further.  Deflation has been arrested, and mild inflation is expected to return this year.  I forecast that the underlying inflation rate for 2010 as a whole will average 1.5 per cent while the average rate of headline inflation will be 2.3 per cent.  I note that commodity prices have generally rebounded and that food prices in the Mainland have also risen.  If the US dollar exchange rate remains soft and these price increases continue, it will add to imported inflation especially in the latter part of the year which in turn may impose a heavier burden on Hong Kong people.

Challenges on the Road to Recovery

17. While our economy is in its early stage of recovery, the road ahead may not be smooth.  In the short term, we must carefully adjust the exceptional measures introduced to combat the financial tsunami and tackle the risk of asset-price bubbles.  In the medium to long term, we must endeavour to promote sustained and steady socio-economic development.

Adjusting Exceptional Measures

18. Since 2008, the Government has implemented a number of measures under the strategy of "stabilising the financial system, supporting enterprises and preserving employment".  These exceptional measures were designed to counter the financial tsunami and would not be adopted lightly in normal circumstances.  They should not and cannot be sustained over a long period of time, lest they impose a heavy burden on public finances and undermine market operation.  Governments around the world are now making plans to exit from their exceptional measures.  Some have already begun to progressively execute these plans.  We should also prepare to adjust our exceptional measures at a suitable time.

19. In respect of the support measures for enterprises, I announced in October 2009 that the application period for the Special Loan Guarantee Scheme would be extended to end-June 2010 to counter the credit crunch triggered by the global financial crisis.  So far, loans worth more than $68 billion have been approved by banks, benefiting over 16 000 enterprises and indirectly preserving jobs for 280 000 or so employees.  I will closely monitor the pace of our economic recovery over the next few months and consider when to let the credit market resume normal operation.

20. On financial measures, the full deposit guarantee will remain in force until the end of this year.  At the Asia Pacific Economic Cooperation Finance Ministers' Meeting last year, I discussed the issue of exit strategies with finance ministers in the region.  The Hong Kong Monetary Authority (HKMA) has also established a tripartite working group with its counterparts in Singapore and Malaysia to work out suitable arrangements to exit from the deposit guarantee regimes.  The HKMA and I will continue to communicate and co-ordinate with the other governments, with the common objective of minimising the impact of exiting from the deposit guarantee on the economy and the banking system.  We have also completed a review on the existing Deposit Protection Scheme.  We will introduce a bill in the current legislative year to ensure that, upon expiry of the full deposit guarantee, the public can benefit from a more suitable protection scheme.

(To be continued)

Ends/Wednesday, February 24, 2010
Issued at HKT 11:13


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