Hong Kong's economy continued to show strong growth momentum at the start of 2005, with GDP rising 6% in real terms, following 8.1% growth in 2004, Government Economist Kwok Kwok-chuen says.

On a seasonally adjusted quarter-to-quarter comparison, GDP expanded for the seventh straight quarter, by 1.5% in real terms in the first quarter of 2005.

On the rise: Government Economist Kwok Kwok-chuen says Hong Kong's economy continued to show strong growth momentum at the start of 2005, with GDP rising 6% in real terms.

Merchandise exports grow

Externally, goods exports held up well for the first quarter as a whole, rising 8.9% in real terms over a year earlier. This was supported by the Mainland's strong trade flows and enhanced price competitiveness from the earlier weakness of the US dollar.

Services exports grew 8.6% in the first quarter as offshore trade continued to surge, while inbound tourism was buoyant.

On the domestic front, consumption demand held firm along with the more entrenched economic recovery, improving labour market conditions and a strong property market. Private consumption spending went up 4.6% in real terms.

Investment demand recovers

Investment demand recovered after a temporary relapse in the fourth quarter of 2004, underscored by a promising business outlook. Overall investment spending reverted to a 2.2% increase in real terms in the first quarter, having temporarily suffered a 1.4% drop in the fourth quarter last year.

Not only did investment in machinery, equipment and software resume positive growth in the quarter. Building and construction activities also turned around to a modest increase after nine straight quarters of fall-off.

The labour market improved along with the economic upturn, with total employment rising to an all-time high in the first quarter of 2005. The seasonally adjusted unemployment rate fell to 6.1% in the first quarter and further to a 41-month low of 5.9% in the three months ending April 2005.

While the economy performed well in the first quarter, the trade outlook is increasingly overshadowed by a number of risks in the external environment, Mr Kwok said.

Outlook overshadowed by external risks

Apart from the sustained high crude oil prices, signs of a regional slow-down have become more evident, leading to a general moderation in their import intake.

The Mainland economy, though showing strong growth in the first quarter, may settle back later in the year, in light of the government's recent tightening measures to cool the overheated property market.

Also, if the US dollar continues to strengthen, Hong Kong's export competitiveness would weaken.

Lately the US has taken steps to institute safeguard measures against seven categories of textile imports from China, and there is a risk the EU will do the same. These factors have added uncertainties to Hong Kong's trade outlook. Compared with two months ago, the trade prospect has dimmed somewhat.

Mr Kwok said the impact of the US' recent safeguard measures is still unclear but he expected the effect will be limited since the textile re-exports from the Mainland to the US and EU accounted for only 4% of Hong Kong's total exports in 2004.

However, he warned that the rise in protectionism will affect the global economy which may eventually have a certain impact on Hong Kong's economy.

Upside from domestic sector

However, there could be some upside from the domestic sector, not only on account of the current strength of local consumption, but also the latest improvement in construction output, the latter being the laggard and hence the main drag on the economic recovery so far.

The opening of Hong Kong Disneyland later this year should boost inbound tourism and lift consumer sentiment. Therefore, on balance, the broad economic picture remains largely positive, despite a somewhat less upbeat trade outlook.

Consumer price inflation remained benign. In the first four months of 2005, the year-on-year increase in the Composite Consumer Price Index was 0.4%.

Modest price pressures

While there may be some modest price pressures from the external front stemming from the high oil prices and the dollar's earlier weakness, local price pressures in overall terms are expected to remain mild over the coming months.

The expansion in supply capacity brought by the hefty capital investment over the past two years should also help alleviate the local price pressures.

With the outturn so far broadly in line with the earlier expectations, the forecast rate of change in the Composite CPI for 2005 is unchanged, at 1.5%.

Speaking on the Monetary Authority's recent measures to refine the operation of the Linked Exchange Rate System, Mr Kwok said the measures can further improve the existing system and bring the abnormally low interest rate back to a normal level.

Interest surge anticipated

He said the recent interest surge is anticipated as the Government had already taken the interest-rate factor into consideration when making its initial economic forecast in March.

Noting Hong Kong's present interest rate is not high, the economist said he does not see the measures will have a big impact on Hong Kong's overall economy nor on inflation.