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Budget Speech by the Financial Secretary (2)
Economic Outlook for 2017

11. Looking ahead, in 2017, the economic growth of advanced economies will be modest and patchy.  This, coupled with new uncertainties brought about by political changes in many parts of the world and rising populist and protectionist sentiments, will further complicate the situation and render the global economic outlook volatile.

12. The US economy has continued to improve in the recent period but the economic policy agenda of the new administration has remained unclear.  Despite the fact that the US may introduce fiscal stimulus measures conducive to global economic growth, there is increasing market concern over whether the US will roll out, in phases, a number of trade protection measures, which may disrupt the improving growth momentum in global trade.  The Federal Reserve Board (Fed) will proceed with or even expedite the normalisation of US interest rates.  Consequently, monetary policy divergence among major central banks will become more pronounced.  All these will impact on the global economy and financial environment.

13. Economic growth in Europe is still constrained by its structural debts.  This, together with the Brexit developments and the upcoming general elections in some major European countries this year, will complicate and add uncertainties to the political and economic outlook for Europe.  This may weigh on the European economy as well as global monetary and financial stability.

14. The growth of the Mainland economy is increasingly driven by domestic demand and the service sector, and is moving towards a pattern of sustainable development.  With stable and appreciable economic growth as well as ample policy room, the Mainland economy should be able to maintain a medium-high pace of growth, remaining a mainstay supporting global economic growth.

15. Japan's economy has been stuck in low gear, facing high deflation risks.  A package of fiscal stimulus and monetary initiatives has been launched but the effectiveness is yet to be seen.

16. As regards emerging markets, international energy and metal prices have rebounded from the low level over the recent past, easing the downward pressure on commodity-exporting economies.  Emerging markets in Asia will remain the main propellers of global economic growth.

17. The slightly improved global economy over the recent period will lend support to Hong Kong's export performance.  If the recent growth momentum continues, our merchandise exports will see a stronger performance this year.  However, the aforesaid risk factors in the external environment will cast shadows over the export trade in Asia and in Hong Kong.  Under these circumstances, sustaining domestic demand will remain crucial to maintaining the stable development of our economy and underpinning the employment market.  Moreover, inbound tourism has improved recently, with fresh growth in the number of visitors.  If this continues, the retail sector should be set to stabilise further.

18. Locally, favourable conditions in the job market and rising labour earnings have bolstered consumer confidence in the recent past.  Sustained increases in infrastructure and other building and construction activities should provide momentum for domestic demand.  In the light of the recent developments and granting no severe external shocks, I forecast Gross Domestic Product (GDP) growth of two to three per cent in 2017.

19. But, the uncertain external environment and interest rate trend may trigger abrupt shifts in capital flows and heighten volatility in local asset prices, with repercussions on consumption and investment sentiments and on macro-economic stability.  Over the past few years, the tight supply of residential flats, ultra-low interest rates and an influx of capital have made the local property market even more exuberant, resulting in high flat prices which are out of tune with the local economy.

20. The current-term Government is committed to increasing land and housing supply, and has introduced several rounds of demand-side management measures and macro-prudential policies.  These efforts have effectively maintained the overall macro-economic and financial stability.  The introduction of the Special Stamp Duty and Buyer's Stamp Duty, together with the earlier increase in Ad Valorem Stamp Duty, has achieved significant results in combating short-term speculation, curbing external demand and reducing investment demand.  Moreover, with the Government's strenuous efforts in increasing land supply in the past few years and the gradual completion of housing units, we expect that the supply of residential flats will increase substantially in the next few years.  However, the property market may have to face potential risks if the Fed normalises interest rates faster this year.  We will closely monitor the situation.

21. The still-low global inflation and strong US dollar have lessened the impact of the rise in international oil prices, maintaining imported inflation at a low level.  Inflationary pressure will remain mild in the short term.  I forecast that the headline inflation rate for 2017 as a whole will be 1.8 per cent with an underlying inflation rate at two per cent.

Public Finance : Objectives and Approach

22. Hong Kong is one of the most advanced economies in the world, despite the relatively small scale of our economy.  Our GDP per capita has now reached US$44,000, overtaking Japan and many advanced economies in Europe.  Hong Kong's success is built on the resilience, hard work and sustained innovative efforts of past generations.  Our achievements are also attributable to the unique advantage of "one country, two systems", the fair and corruption-free system, rule of law, and the open and efficient market that we have.  I believe that while recognising the effect of market forces, the Government should play an active role as a facilitator by taking forward appropriate policies with the optimal use of public resources.  Only by doing so can we build a caring, just and pluralistic society, helping Hong Kong develop as an even more liveable, sustainable and vibrant city.

Developing the Economy and Improving Livelihood

23. Specifically, public finance should serve three objectives.  First, the Government must be appropriately proactive in developing the economy and improving people's livelihood.  We must strengthen the competitiveness of and explore new markets for the pillar industries.  We must also help industries over which we have advantages as well as emerging industries and identify growth opportunities so that the economy can prosper in a sustained and diversified manner.  I believe that, as long as all industries can continue to grow and flourish, young people will have better job opportunities, greater upward mobility as well as a platform to realise their dreams.  Only by giving the younger generation hope for the future can our city remain vibrant, joyful and positive.

24. Whatever is taken from the people ought to be used for the people.  The Government must uphold the principle of people-based governance.  Government resources should primarily be used to improve people's livelihood and cater for the needy groups in the community.  Given limited resources, it is not possible to meet all livelihood-related policy objectives at one stroke.  We must allocate resources according to need and priority, striking a balance between the desired policy outcome and the affordability of the Government and progress towards our goals at a measured pace.

Investing for the Future and Enhancing Liveability

25. Second, the Government must be forward-looking and invest continuously for the future of Hong Kong.  We should create capacity for both development and environment, and enhance competitiveness, so that our economy and society can develop in a sustained manner and our living environment can keep improving.

26. With respect to hardware, the Government has kept investing in infrastructure, including land production and expansion of the air, sea and land transport networks, to support our social and economic development.  The Government's annual expenditure on capital works projects has increased significantly from a mere $62.4 billion in 2012-13 to $86.8 billion in 2017-18, allowing the construction industry to contribute 4.7 per cent to our GDP.  I wish to point out that, other than improving people's quality of life and enhancing our business environment, these projects have created tens of thousands of jobs for the construction industry, transport industry and other trades.

27. Human capital is Hong Kong's most important asset.  In the face of stiff competition from other economies and a new economic landscape arising from technological development, we must continue to invest heavily in nurturing talent for a knowledge-based economy and promote diversified and high value-added economic development for Hong Kong.  The current-term Government has made significant efforts to promote Innovation and Technology (I&T).  These include establishing the Innovation and Technology Bureau in November 2015, allocating over $18 billion so far to enhance our I&T ecosystem, providing funding support for universities and the industry to conduct research and development (R&D) activities and supporting start-ups.

28. To improve people's quality of life, the Government is committed to developing Hong Kong into a smart city by leveraging I&T to enhance city management.  We have commenced a comprehensive study to formulate the policy objectives and a blueprint for developing Hong Kong into a smart city.

29. The Government will continue to invest substantially to protect and enhance our environment, striving to further improve the air quality, water quality, green and blue assets and waste management; and step up efforts to combat climate change and conserve nature, thereby making Hong Kong an even more liveable city.

(To be continued.)
Ends/Wednesday, February 22, 2017
Issued at HKT 11:16
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