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The forecast growth rate in real terms of GDP for this year has been revised to 2%, up from 1.5% in the May update. This is due to the GDP outturn in the second quarter being higher than earlier thought, and taking into consideration the current pace of Hong Kong's economic upturn.
On the price front, local costs and prices are expected to remain generally subdued in the coming months, so the Composite CPI forecast rate has been revised down, to -3%, from -2.5% in the May round.
Announcing second-quarter economic details and forecasts for the year, Government Economist Tang Kwong-yiu said SARS hit Hong Kong's economy hard. It caused second-quarter GDP to slacken off, resulting in a 0.5% decline in real terms over a year earlier. That follows the first quarter's solid growth of 4.5%.
On a seasonally adjusted quarter-to-quarter comparison, GDP fell visibly, by 3.7% in real terms in the second quarter, following a 0.3% decline in the first quarter.
SARS damages tourism sector
The blow to inbound tourism and travel-related sectors was severe, particularly in April and May. Even with some relative improvement in June, exports of services for the second quarter still plummeted by 14.7% in real terms over a year earlier, down markedly from the 12.6% increase in the first quarter. While offshore trade continued to grow, it rendered only a partial offset.
Local consumer spending likewise fell distinctly in April, yet went up steadily in May and June as the SARS threat receded. For the second quarter, private consumption expenditure fell 2.2% in real terms over a year earlier, down slightly from the 2% decline in the first quarter.
The setback was concentrated in residents' spending abroad, as local people avoided visits to SARS-affected places.
Investment spending slackened considerably, to a 5.3% decline in real terms in the second quarter over a year earlier. That was in contrast to a 3.5% increase in the first quarter.
Building and construction output saw an enlarged decline amid a weak property market, while machinery and equipment intake also moderated markedly as business conditions faltered.
Exports sustain double-digit growth
Nevertheless, Mr Tang said total exports of goods were relatively unaffected by SARS, sustaining double-digit growth all through the second quarter.
After a 19.1% surge in real terms in the first quarter over a year earlier, there was a further leap of 14.3% in the second quarter. The robust external trade gave the economy a cushion against the setback in the domestic sector.
As the fuller impact of SARS on the labour market set in, the seasonally adjusted unemployment rate rose markedly from 7.5% in the first quarter to 8.6% in the second quarter, and to a new high of 8.7% in the three months ending July.
Underemployment at 4.2%
The underemployment rate likewise rose, from 2.9% to 4.3% between these two quarters, but edged down to 4.2% in the three months ending July.
Overall economic activity began to bottom out towards the end of May, and has improved in June, July and August. The improvement is most visible in inbound tourism and the travel-related sectors, as visitor arrivals, being bolstered in particular by the swift return of Mainland visitors, are recovering fast.
Local consumer sentiment has also been rising, with strong promotions by the affected trades and a Government relaunch campaign encouraging consumer spending.
Economy to pick up, with a sharp upturn in tourism
Mr Tang expected the economy to continue to pick up over the rest of the year. In the external sector, service exports are expected to be vibrant. Inbound tourism looks set for a sharp upturn, particularly with the added boost from the launch of the "individual visit" scheme for Mainland visitors to Hong Kong.
Offshore trade is likely to remain brisk, supported by strong trade flow in the Mainland and a generally improved global economic environment.
Exports of goods are also expected to advance further, albeit with the growth rate probably not as high as in the earlier months as the base of comparison shifts higher for the latter part of the year.
A continued robust external sector performance should in turn bring about beneficial spill-overs to the local economy.
In the domestic sector, with sentiment reviving after SARS, consumer spending seems likely to recover further in the second half of the year. On the other hand, investment spending may remain slack until demand picks up more to underpin the overall business conditions.
Terrorist attacks cast shadow on global scene
There could be more upside potential if the growth momentum in exports of goods and offshore trade remains just as strong through the latter part of the year, and if inbound tourism surges even more.
On the other hand, the recent resurgence of geo-political tension and terrorist attacks in some places again casts a shadow on the global scene.
Local retailers and service providers are likely to continue to exercise restraint on prices while overall demand in the economy is yet to return fully to normal. Wages and rentals are likely to come down further, as SARS impact has exacerbated the slack conditions in the labour and property markets.
These factors, combined with Government relief measures, will outweigh the effect of higher prices of retained imports brought about by the earlier weakening in the US dollar and the rise in world commodity prices.
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