Hong Kong's economic recovery bloomed into a full-fledged upturn in the second quarter, with Gross Domestic Product soaring 12.1% in real terms, the fastest growth in four years.

With the outturn so far this year exceeding earlier expectations, and both external and local demand likely to hold up well through the rest of the year, GDP for this year as a whole is now forecast to grow by 7.5%, 1.5 percentage points up from 6% in May.

Steady growth: Acting Government Economist Elley Mao anticipates this year's GDP will grow by 7.5%. Exports of goods are expected to continue to fare well in the months ahead.

Consumer price change revised to 0%

The forecast change rate in this year's composite consumer price index is revised upwards to zero change from -1% in the May round.

As domestic demand strengthens further and as the uptrend in world commodity prices and higher inflation in the major supplier economies including the Mainland filters through, consumer price inflation is expected to remain positive in the remaining part of the year after registering a 0.9% rise in July.

Similarly, the forecast change rate for GDP deflator this year is revised upwards to -2.5% from -3% in May. It is expected the price decline rate will continue to taper, as consumer prices bounce back along with the activity upturn, and as the drag on the terms of trade from the earlier weakness in the US dollar gradually dissipates.

GDP growth up significantly in Q2

Announcing the Half-Yearly Economic Report 2004 and second quarter's economic situation, acting Government Economist Elley Mao said the double-digit GDP growth, against an exceptionally low base of comparison caused by SARS a year earlier, was significantly up from the 7% growth in the first quarter. It was also the fastest growth in four years.

On a seasonally adjusted quarter-to-quarter comparison, GDP grew by 2.6% in real terms, faster than the 1.2% growth in the first quarter.

External trade was even more vibrant in the second quarter, aided by a generally sanguine global economic environment. Exports of goods grew by 18% in real terms in the second quarter over a year earlier, up from an already robust growth of 14.8% in the first quarter.

Service exports grow by nearly a third

Exports of services leaped 31.3% in real terms over a year earlier, after 12.6% first quarter growth. Offshore trade and related freight service exports continued to surge.

Inbound tourism recorded phenomenal growth of over 100%, although the year-on-year growth should have been inflated at least partly by the low base effect caused by SARS a year earlier.

Consumer spending growth fastest in 13 years

Consumer spending remained brisk as sentiment returned amid a steadily improving labour market. Private consumption expenditure surged 11% in real terms in the second quarter over a year earlier. This was up from the 6% growth in the first quarter and was the fastest in almost 13 years, signifying a continued upturn in local consumer spending.

As the business outlook improved, machinery and equipment acquisition picked up substantially in the second quarter, and more than offset the continued fall-off in construction activity. Overall investment expenditure grew 13.2% in real terms in the second quarter over a year earlier, from the 5.5% growth in the first quarter. This was the fastest growth in three-and-a-half years.

Jobless rate falls to 28-month low

In parallel with a broad-based strengthening in labour demand, the seasonally adjusted unemployment rate fell from 7.2% in the first quarter to a 28-month low of 6.9% in the second, and stayed at this level from May to July.

Total employment saw 2.6% growth in the second quarter over a year earlier, up from the 0.8% growth in the first. Vacancies also surged across all major economic sectors.

Deflation has now subsided. The generally improved economic conditions, revived consumer demand and higher import prices have prompted many retailers to reduce the earlier price discounts or even to raise the prices of some consumer items.

68 months of deflation halted

The composite CPI reverted to a 0.9% increase in July over a year earlier, signifying the end of a 68-month-long deflation.

On the near-term outlook, Miss Mao said the external environment is still overshadowed by surging oil prices, rising US interest rates, and macroeconomic adjustment on the Mainland. Yet, so far, these risk factors have not reversed or severely dampened the global growth momentum.

She said the Mainland economy stays strong as trade surges ahead, notwithstanding the concurrent slowdown in overall investment. Demand in the industrialised economies also remains firm with industrial production rising and exports staying buoyant.

Miss Mao expected the decline in oil dependency over the years should have rendered these economies less vulnerable to the oil price hike. Moreover, the overall monetary stance in the US remains largely accommodative, despite a recent rise in US interest rates. Local interest rates have managed to stay at a low level so far.

Global economic growth the fastest since 2000

"The global economy maintains a generally positive tone. The widely held view is that even allowing for some moderation in global demand in the latter part of this year upon rising interest rates and surging oil prices, global economic growth for the year as a whole is still likely to stay healthy and will be the fastest since 2000," Miss Mao said.

It is expected that export-dependent Asian economies, including the Mainland and Hong Kong, will continue to benefit from the sturdy demand in the industrialised economies for the rest of the year.

"Exports of goods are expected to continue to fare well in the months ahead, eventhough growth may not be as rapid as in early this year. Exports of services are also expected to maintain strong growth momentum in the rest of the year," Miss Mao said.

Consumer spending poised for further growth

"In the domestic sector, consumer spending is poised for further solid growth. Machinery and equipment investment should remain intensive, as companies reinstate their capacity to cater for the anticipated growth in business as profits improve and as deflation ends.

"Construction activity may also turn around towards the end of this year. But for the year as a whole, there will still be a rather large decline, in face of the distinct fall-off so far this year."