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ECONOMIC GROWTH TO BE STABLE IN 2005 ACCORDING TO HKU APEC STUDY CENTRE

07 Apr 2005

 

Hong Kong Economic Outlook

　　The APEC Study Centre of the University of Hong Kong (HKU) released its quarterly Hong Kong Macroeconomic Forecast today, announcing an estimation of 5.3% in real GDP growth in the first quarter of 2005 on a year-on-year basis.
　　
　　This growth estimate is an upward revision of the 4.4% forecast released on January 11, 2005 due to stronger than expected growth in external demand.
　　
　　Professor Y.C. Richard Wong, Director of the APEC Study Centre at HKU, remarked, “Following the broad-based economic recovery last year with real GDP growing by 8.1%, the Hong Kong economy is forecast to continue to grow at above its trend rate in the current year.”
　　
　　“The labour market is expected to keep on improving with the unemployment rate projected to fall to 5.7% by the end of the second quarter. Inflation rate will remain moderate with the Composite CPI increasing by around 0.7% in the current quarter,” He added.
　　
　　“In the second quarter of 2005, real GDP is forecast to grow at 4.7% when compared with the same period last year. The deceleration in output growth is primarily accounted for by a slowdown in the growth of private consumption spending,” said Dr Alan Siu, Executive Director of the APEC Study Center at HKU.
　　
Forecast Highlights

The highlights of our current forecasts are:

* Private consumption grew by 5.7% in the fourth quarter of 2004. Buoyed by improving consumer sentiment underpinned by lower unemployment level, it is projected to expand by 5.3% in the first quarter of 2005 and 4.3% in the second quarter of 2005.

* The volume of retail sales grew by 3.0% in January 2005. Due to the continued strengthening of local demand and the influx of the Mainland visitors, the volume of retail sales is forecast to grow by 5.6% in the first quarter of 2005. The growth in the volume of retail sales will moderate to 2.9% in the current quarter.

* In real terms, total exports of goods rose by 12.6% and attained a record high in the fourth quarter of 2004. It is projected to grow by 13.5% in the first quarter of 2005. In the second quarter, export growth will moderate to 9.5% reflecting a deceleration in the growth rates of Hong Kong's major trading partners.

* Domestic Exports grew by 4.7% in the fourth quarter of 2004, reverting the decrease of 0.6% in the third quarter of 2004. Domestic exports is forecast to fall by 4.4% and 2.1% in the first and second quarter of 2005.

* Re-exports grew by 13.2% in the fourth quarter of 2004. The double-digit growth in re-exports is expected to be maintained, growing by 14.7% in the first quarter of 2005, but moderating to 10.2% in the second quarter of 2005.

* Service exports grew by 7.3% in the fourth quarter of 2004. The outlook in the service exports stays positive. The opening of the Disneyland theme park in September is expected to draw in record number of visitors from the region, particularly from the Mainland. The robust growth in the total exports of goods will provide support for the growth of trade related services Service exports is forecasted to grow by 8.1% and 8.3% in the first and second quarter of 2005, respectively.

* The growth of imports of goods slowed down to 7.0% in the fourth quarter of 2004, compared to 14.2% in the third quarter of 2004. The weakening of the US Dollars made imports more expensive, with the unit value index of end-user imports rising by 4.2% in January 2005. Imports of goods is expected to grow more slowly than the exports of goods, growing by 9.0% in the first quarter, and moderating to 6.5% in the current quarter.

* The import of services rose by 6.0% in the fourth quarter of 2004. The broad-based economic recovery in 2004 helps to stimulate outbound tourism. The number of aircraft movements was at record high during the holiday season. Service imports is forecast to grow by 6.7% and 4.5% in the first and second quarter of 2005, respectively.

* The trade balance, as measured by the net exports of goods and services, is estimated to be 17.7% of GDP in the fourth quarter of 2004, and forecast to be 11.3% of GDP in the first quarter of 2005, and 10.2% of GDP in the current quarter.

* The investment outlook is neutral. The total gross fixed investment is expected to remain flat in the first quarter of 2005 and drop slightly by 0.2% in the second quarter of 2005.

* Investment in land and construction dropped by 1.6% in the fourth quarter of 2004. Due to the lack of commencement of major construction projects, the investment in land and construction is forecast to drop by 3.8% in the first quarter of 2005 and 5.2% in the second quarter of 2005.

* Investment spending in machinery, equipment and computer software decreased by 2.4% in the fourth quarter of 2004. It is estimated to revert to positive growth by 2.9% in the first quarter of 2005 and 3.1% in the current quarter.

* Better consumer sentiment, rising import prices, increasing rents and the influx of Mainland visitors all contributed to the 0.2% increase in the Composite CPI in the fourth quarter of 2004. As the rental contracts signed during the SARS period in 2003 expired this year, the rental component of the CPI will start to reflect the current higher market rents. The Composite CPI is forecasted to increase by 0.4% in the first quarter of 2005 and by 0.7% in the current quarter.

* The provisional seasonally adjusted unemployment rate dropped to 6.1% in the three months average ending in Feb 2005 from its previous estimate of 6.4% for the three months ending in Jan 2005. The improvement in the labour market is expected to continue. The unemployment rate is forecast to fall to 5.9% in the first quarter of 2005, and drop further to 5.7% in the current quarter.

Concluding Remarks

US interest rates are expected to increase further in 2005, and local rates are set to follow suit. In 2004, the spread between Hong Kong and US interest rates had widened, as substantial fund inflows in the latter part of the year drove local rates substantially below that of the U.S. The divergence between the Hong Kong and US rates last year is unusual. Given the Linked Exchange Rate System, interest rate arbitrage will work to close the gap over the long term. The speed of adjustment depends on uncertain fund flows. There is a risk that sharp hikes in local interest rates would lower growth.

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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