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Economic Recovery is Expected to be Sustainable According to HKU APEC Study Centre

08 Jul 2004

 

Hong Kong Economic Outlook

The economy is estimated to grow by 7.7% in the first three quarters, and by 6.5% to 7.5% for the year as a whole, according to the quarterly Hong Kong Macroeconomic Forecast, released by the APEC Study Centre of the University of Hong Kong (HKU) today.

Dr Chow Yei-Ching, member of the Board of Directors of HKU Foundation and Chairman of Steering Committee of the Hong Kong Macroeconomic Forecast, remarked, "According to the current forecast, we are pleased to note that the economy recovery in Hong Kong, starting from the third quarter of last year, is expected to be sustainable. Despite higher oil prices and the recent quarter of a percentage point increase in the US federal funds rate, the global economy will continue to grow at a robust pace, thus providing continued support for Hong Kong's external demand. In particular, the Mainland economy has remained vibrant, with the moderation in investment growth offset by strong consumption spending. Hong Kong's private domestic demand has rebounded sharply from the SARS impact, and is expected to hold up given the positive economic outlook."

Professor Richard Wong Yue-Chim, Director of the APEC Study Centre at HKU, further pointed out, "Real GDP growth in the second quarter this year is forecast to be at double-digit, with output growing by 11.2% when compared with the low base in the second quarter of last year. This growth estimate is an upward revision of the 9.2% forecast released on April 7, 2004. In the third quarter, economic growth will continue, with real GDP projected to grow by 5.4% on a year-on-year basis. For the first half of this year, real GDP is forecast by grow by 8.9% when compared with the same period last year."

Forecast Highlights

Professor Richard Wong Yue-Chim, Director of the APEC Study Centre at HKU and Dr Alan Siu, the Centre's Executive Director, presented the highlights of the current forecasts.

•Private consumption spending rose by 5.0% in the first quarter of 2004. Boosted by better consumer sentiment and the lower base of comparison due to the SARS epidemic last year, it is projected to grow by 7.3% in the second quarter and by 5.2% in the third quarter of 2004, both on a year-on-year basis.

•Comparing with the lower base last year, the volume of retail sales grew rapidly by 20.0% year-on-year in April 2004, rising for the ninth consecutive month. Buoyed by improving domestic demand and the influx of Mainland visitors, the volume of retail sales is forecast to grow in the second and third quarters of 2004 by 17.2% and 11.5% respectively, both on a year-on-year basis.

•Domestic exports registered an increase of 0.8% in the first quarter of 2004. It is estimated to expand by 5.1% in the second quarter of 2004 but revert back to a decrease of 5.4% in the third quarter of 2004, on a year-on-year basis. Although domestic exports is expected to fall in the second half of this year, the rate of decline will be significantly less than the ones experienced in previous years.

•Re-exports exhibited a strong growth of 16.1% in the first quarter of 2004 along with the improving global economy. The growth in re-exports is projected to be 17.5% in the second quarter of 2004, but moderate to 8.8% in the third quarter of 2004, both on a year-on-year basis.

•Given the rapid growth in the number of visitors from the Mainland, exports of services registered a double-digit growth of 13.7% in the first quarter of 2004. Comparing with the same period last year, the total number of visitor arrivals surged by 28.6% and 251.8%, with hotel occupancy rate kept at 94% and 86%, in March and April 2004 respectively. The export of services is estimated to grow sharply by 41.3% in the second quarter of 2004 due to the lower base of comparison. The growth momentum of visitor arrivals is expected to be maintained in the second half of this year, with the export of services expected to rise by 14.7% in the third quarter of 2004.

•Imports of goods expanded further by 16.3% in the first quarter of 2004. Retained imports pick up noticeably by 16.9% in the same period reflecting the economic revival from the SARS impact last year. In tandem with the strong demand of re-exports, the growth in the imports of goods is projected to be 18.6% in the second quarter. The growth is expected to moderate to 10.3% in the third quarter of 2004.

•Imports of services went up by 4.0% in the first quarter of 2004. The number of resident departures grew by 9.5% and 69.9% in March and April 2004 respectively. The growth is expected to continue in the summer months. Service imports is projected to pick up further by 27.6% in the second quarter of 2004 due to the lower base of comparison. The growth will be 7.2% in the third quarter 2004.

•The trade balance, as measured by the net exports of goods and services, is 5.0% of GDP in the first quarter of 2004. The net trade balance is estimated to be 6.7% of GDP in the second quarter of 2004 and to rise to 10.3% of GDP in the third quarter of 2004.

•Investment in land and construction declined by 5.2% in the first quarter of 2004. The fall is projected to moderate, with the investment in land and construction forecasted to drop by 0.5% in the second quarter and to turn to an increase of 1.5% in the third quarter of 2004.

•Investment spending in machinery, equipment and computer software rose by 15.9% in the first quarter of 2004. It is estimated to expand further by 16.3% in the second quarter of 2004 but moderate to 4.8% in the third quarter of 2004 on a year-on-year basis. The double-digit growth in the first half is mainly due to the lower base of comparison.

•Deflation, as measured by the year-on-year percentage change of the Composite Consumer Price Index, has become less of a problem. Rising import prices, coupled with improving domestic demand, have arrested the downward pressure on consumer prices. In May 2004, most components of the CPI were more expensive when compared with the same period last year, with housing and durable goods being the exception, but the fall in these two components decelerated to 6.8% and 1.4% respectively. The CPI is estimated to drop by 0.9% in the second quarter of 2004 and to rise by 0.3% in the third quarter of 2004.

•The provisional seasonally adjusted unemployment rate dropped by a modest 0.1 percentage point from 7.1% in the three months ending April 2004 to 7.0% in the three months ending May 2004. The median duration of unemployment decreased from 109 days in the fourth quarter of 2003 to 103 days in the first quarter of 2004. The unemployment level is expected to fall slowly, with the unemployment rate forecasted to be 6.9% in the second quarter of 2004 and 6.7% in the third quarter of 2004.

Conclusion

Professor Richard Wong concluded, "The positive economic outlook is clouded by uncertainties. Global economic recovery could be side-tracked if oil prices shot up for a prolonged period in the next 6 months. Interest rates are also expected to increase further in the U.S. which would dampen its economic growth next year. On the domestic front, the sluggish adjustment in the labour market is a cause for concern. Despite four consecutive quarters of robust economic growth, the unemployment rate is still way above its natural rate. It appears that another year of sustained economic growth is required to bring the jobless number down to its equilibrium level."


About Hong Kong Macroeconomic Forecast Project

The Hong Kong Marcroeconomic Forecast is based on research conducted by the APEC Study Centre of the HKU's Faculty of Business and Economics. It aims to provide the community with timely informtion useful for tracking the short-term fluctuations of the economy. The current quarter marco forecasts have been released on a quarterly basis since 1999.

The high frequency forecasting system was originally developed in collaboration with Professor Lawrence Klein of the University of Pennsylvania in 1999-2000. Since then, the system has been maintained and further refined by the HKU APEC Study Centre.

The project is sponsored by the HKU Foundation for Educational Development and Research. The Steering Committee is chaired by Dr Chow Yei-Ching, Chairman & Managing Director of Chevalier International Holdings Ltd, with Mr Michael Leung, Executive Chairman of Onwel Group, as Deputy Chairman. Both Dr Chow and Mr Leung are members of the Board of Directors of the HKU Foundation.

The Hong Kong Centre for Economic Research at HKU provides administrative support to the project. Researchers at the APEC Study Center are solely responsible for the accuracy and interpretation of the forecasts. Our quarterly forecasts can be accessed at http://www.hku.hk/apec/cqm/

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