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HKU Predicts a Stable Growth in 2006

06 Apr 2006

 

Hong Kong Economic Outlook

The APEC Study Centre of the University of Hong Kong (HKU) today (April 6, 2006) released its quarterly Hong Kong Macroeconomic Forecast. According to its High Frequency Macroeconomic Forecast, real GDP growth in the Q2 of 2006 is forecast to grow at 5.5% on a year-on-year basis.

The real GDP growth in the Q1 of 2006 is estimated to be 6.1% when compared with the same period last year. This growth estimate is a slight downward revision from the 6.2% forecast released on January 4, 2006.

"The deceleration in real GDP growth can be attributed primarily by a slight weakening in external demand. Rising interest rates are also weighing down consumption and investment spending in the local economy," said Dr Alan Siu, Executive Director of the APEC Study Center at the HKU.

Professor Y.C. Richard Wong, Deputy Vice-Chancellor of HKU, said, "Following the broad-based economic recovery in recent years with real GDP growing by 8.6% in 2004 and 7.3% in 2005, the Hong Kong economy will remain strong in the current year, as global economic growth is expected to continue, albeit at a slower rate. The labour market will continue to improve with the unemployment rate expected to be around 5%. Rising interest rates, wages and rentals are putting upward pressure on prices, with the inflation projected to be around 2% in the current quarter."

Forecast Highlights

- Private consumption grew by 3.7% in the fourth quarter of 2005. Supported by continued improvement in the labour market, private consumption spending is forecast to grow by 2.5% in the first quarter of 2006 and 2.1% in the second quarter of 2006.

- The volume of retail sales grew by 10.5% in January 2006. 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 7.1% in the first quarter of 2006. The growth in the volume of retail sales will moderate to 5.6% in the current quarter.

- In real terms, total exports of goods rose by 11.4% in fourth quarter of 2005. It is projected to grow by 11.6% in the first quarter of 2006. In the second quarter, export growth will moderate to 9.7% reflecting a deceleration in external demand.

- Domestic Exports rose by 28.0% in the fourth quarter of 2005, picking up from the 14.2% growth in the third quarter of 2005. Hong Kong’s clothing and office equipment domestic exports performed exceptionally well early this year. Taking first 2 months of 2006 together, these 2 categories accounted for 38 percentage point to the 41.7% overall nominal growth. Real domestic exports is forecast to surge by 45.3% and 33.2% in the first and second quarter of 2006, respectively.

- Re-exports grew by 10.3% in the fourth quarter of 2005. The growth in re-exports is expected to slowdown to 9.8% in the first quarter of 2006 and to 8.5% in the second quarter of 2006.

- Imports of goods grew by 12.0% in the fourth quarter of 2005, picking up from the 11.0% rate in the third quarter of 2005. The growth of imports of goods is expected to moderate to 11.0% in the first quarter, and to 9.7% in the current quarter.

- Service exports grew by 7.7% in the fourth quarter of 2005. Visitor arrival grew by 10.9% in February with visitors from the mainland accounted for 52.9% of the total growth. Service exports is forecast to grow by 6.2% and 3.7% in the first and second quarter of 2006, respectively.

- Service imports rose by 1.4% in the fourth quarter of 2005. Transportation and travel related service imports are hit by higher energy supplement costs. Service imports is forecast to further slowdown to 0.9% and 1.8% in the first and second quarter of 2006, respectively.

- The trade balance, as measured by the net exports of goods and services, is estimated to be 19.0% of GDP in the fourth quarter of 2005, and forecast to be 15.2% of GDP in the first quarter of 2006, and 13.5% of GDP in the current quarter.

- Gross fixed capital spending grew by 7.5% in the last quarter of 2005. The investment growth is expected to moderate in the first quarter of 2006 to 4.3% and to 2.5% in the second quarter of 2006.

- Investment in land and construction dropped by 15.5% in the fourth quarter of 2005. Due to the lack of commencement of large-scale construction projects, the investment in land and construction is forecast to remain subdue and decreased by 12.0% in the first quarter of 2006 and by 11.4% in the second quarter of 2006.

- Investment spending in machinery, equipment and computer software surged by 24.2% in the fourth quarter of 2005. It is estimated to expand by 16.5% in the first quarter of 2006 and by 10.5% in the current quarter.

- Housing rents contributed 0.9 percentage point to the 1.6% increase in the Composite CPI in the February 2005. Increasing rentals and rising interest rates put upward pressure on the general price level. Inflation rate is forecast to increase to 2.0% in the first and second quarter of 2006.

- The provisional seasonally adjusted unemployment rate stood at 5.2% in the three months average ending in Feb 2006, same as its previous estimate in Jan 2006. The improvement in the labour market is expected to continue, with unemployment rate forecasted to be 5.2% in the first quarter of 2006 and dropping to 5.1% in the current quarter.

Concluding Remarks

Hong Kong is expected to continue to have another year of stable economic growth, with real GDP forecast to grow by 5% to 6% for the year as a whole. But inflationary pressure is building up, and the economic outlook is still clouded by uncertainties over the interest rate cycle. Global economic growth can be derailed by unexpected sharp rises in interest rates.

About Hong Kong Macroeconomic Forecast Project

The Hong Kong Macroeconomic Forecast is based on research conducted by the APEC Study Center of the HKU's Faculty of Business and Economics. It aims to provide the community with timely information 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 Center.

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.

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

More about Hong Kong economic forecast, please visit http://www.hiebs.hku.hk/apec/macroforecasts#2017 .