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HKU APEC Study Centre Forecasts: Hong Kong is out of recession

13 Oct 2003

 

Hong Kong Economic Outlook

The economic environment has improved markedly since the World Health Organisation declared Hong Kong to be SARS-free on June 23, 2003. The rapid rebound in visitor arrivals provided much needed relief to the tourism related sectors.

The signing of the Closer Economic Partnership Arrangement (CEPA) served to provide a focus on future business opportunities. Capital inflows helped to lift the stock market and strengthen the local currency. Output growth in Hong Kong's major trading partners is expected to hold up in the second half of this year. There are more signs of a revival in Japan, and the strong euro makes Hong Kong's exports more competitive.

This quarterly forecast is released by the APEC Study Centre of the University of Hong Kong using a "high frequency" forecasting model. According to today's release, real GDP is forecasted to increase by 2.3% year-on-year in the third quarter of 2003, turning around from the -0.5% contraction in the second quarter of 2003.

Dr Chow Yei-Ching, member of the Board of Directors of HKU Foundation and Steering Committee Chairman of the Hong Kong Macroeconomic Forecast, remarked, "The sequence of positive developments served to bring Hong Kong out of its latest economic recession experienced in the first half of this year. The robust growth in the exports of goods and services, coupled with improving consumer sentiments laid the foundation for the economic recovery."

He also pointed out, "The growth momentum is expected to continue, with real GDP growing by 2.6% year-on-year in the fourth quarter of 2003. For the current year as a whole, real GDP is projected to grow by 2.2%."

Forecast Highlights

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

- Battered by SARS, private consumption spending dropped by 2.2% in the second quarter of 2003. In the third quarter of 2003, despite an observable improvement in consumer sentiments, consumption spending was still weighed down by the high unemployment rate, and is projected to fall by 0.4% when compared with the same period last year. As the economy continues to recover, consumption spending will be stronger and is forecasted to increase at an annual rate of 1.3% in the fourth quarter of 2003.

- The volume of retail sales shrank by 0.3% year-on-year in July, but grew by a robust 2.9% in August due to improving consumer sentiments and the sharp increase in visitor arrivals, particularly from the Mainland. It is expected to improve steadily in the current quarter.

- Domestic exports dropped by 12.6% in the second quarter of 2003, continuing the fall started in the fourth quarter of 2000. The downward momentum will continue but the rate of decrease is expected to moderate. It is predicted to fall by 6.1% in the third quarter and by 3.1% in the fourth quarter of 2003.

- After growing by 19.4% year-on-year in the first half of this year, the growth in the re-exports of goods will decelerate to 11.6% and 10.7% in the third and fourth quarters of 2003, respectively.

- Reflecting the 57.9% drop in the number of visitor arrivals, export of services dropped sharply by 14.7% in the second quarter. The number of visitor arrivals rebounded sharply and grew by 9.6% year-on-year in August, mainly due to the huge influx of Mainland visitors, with the number of visitors from the Mainland jumped by 43.4% year-on-year. The export of services is projected to grow by 5.6% and 5.8% in the third and fourth quarters of 2003 respectively.

- The import of goods increased by 10.9% in the second quarter of 2003 mainly to support the growth in re-exports, as retained imports fell by 3.7%, reversing the upward trend in the preceding 4 quarters. Reflecting the projected growth in re-exports, the import of goods is estimated to increase by 7.1% and 7.3% in the third and fourth quarters of 2003 respectively.

- The import of services dropped by 19.6% in the second quarter of 2003 due to SARS. The number of resident departures recorded the low level at 3.7 million persons in April 2003. The number picked up quickly after SARS was brought under control. In August, the number of resident departures grew by an annual rate of 2.3% to 6.0 million persons. The import of services is predicted to expand at the year-on-year growth of 4.7% in the third quarter and 8.8% in the fourth quarter of 2003.

- The trade balance, as measured by the net exports of goods and services, was estimated to 6.3% of GDP in the second quarter of 2003. Due to the stronger growth in the exports of goods and services, the overall trade balance is forecasted to rise sharply to around 15% of GDP in the second half of 2003.

- The investment spending on machinery, equipment and computer software shrank by 2.4% in the second quarter of 2003 on an annual basis, and is to contract by 1.9% in the third quarter, and 4.3% in the fourth quarter of 2003.

- Investment in land and construction fell by 8.3% decline in the second quarter of 2003 on an annual basis. With no major new project commencing in the second half of 2003, construction related investment will remain subdued, and is predicted to decline by 7.6% in the third quarter and by 6.7% in the fourth quarter of 2003 on a year-on-year basis.

- In August, the composite CPI declined by 3.7%, with 2.2 percentage points of the fall attributed to the housing component which fell by 7.9%. The rates concession for the third quarter of 2003 and the waiver of water and sewage charges worsened the measured deflation rate in August by 1.1 percentage points. The headline deflation rate is forecasted to be 3.7% in the third quarter of 2003. As the economy improves further, the fall in the consumer price level is expected to moderate and is projected to be 2.5% in the fourth quarter of 2003.

- The provisional seasonally adjusted unemployment rate in June to August is 8.5%, improving slightly from the high level of 8.6% in May to July. The median duration of unemployment stayed flat at 82 days in the second quarter of 2003. Unemployment is still concentrated in the construction sector, with unemployment rate at 19.3% in July 2003. The employment situation is expected to improve though slowly. The unemployment rate is forecasted to be 8.5% in the third quarter and 8.4% in the fourth quarter of 2003.

Conclusion

Professor Richard Wong concluded, "Given the positive external environment, the economic recovery started in June is expected to continue. The current stance of economic policy with the primary focus on stimulating growth is conducive to the recovery process. But the short-term outlook is clouded by the likelihood of re-emergence of SARS in the coming months. The economy is resilient enough to withstand minor localized outbreaks, but another large-scale SARS epidemic could do serious damage to the economy. Hong Kong has to be prepared for the next test."

About Hong Kong Macroeconomic Forecast Project

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/

For media enquiries, please contact Miss Polo Leung at HKU's External Relations Office at 2859 2600.