Hong Kong's exports are expected to expand at a slower, but sustainable pace in 2005, with total exports to rise 8.5% in value or 7.5% in volume, Trade Development Council Chief Economist Edward Leung says.

He said domestic exports are forecast to fall 2% in value and 2.5% in real terms, while re-exports will show nominal and real growth of 9% and 8%.

Releasing the Hong Kong's Export Outlook for 2005: A Year of Consolidation report today, Mr Leung said the US and the Mainland - the world's two most powerful economic growth engines - will continue to fuel Hong Kong's exports growth.

Weak US dollar benefits HK exports

He said the US dollar is expected to stay weak for some time because of the country's fiscal and current account deficits, enabling Hong Kong exports to stay competitive, particularly in the EU and Japanese markets.

The US' economic expansion will likely be restrained by interest rate hikes, while the Mainland's economic growth will be slowed by stringent measures it has adopted to prevent its economy from overheating.

"Both factors impact on Hong Kong's exports, but fortunately not to an extent it cannot bear," he said.

Mr Leung said despite the recent slackening of oil prices, volatility in crude oil prices remains a cause for concern, given the high demand compared with the nearly full capacity of production.

US protectionism will persist

He cautioned US protectionism is expected to persist in the wake of the removal of textile quotas in January next year, as the country will probably adopt "safeguards" to contain the expected flood of textile and clothing products from China following the scrapping of quotas.

On local products, Mr Leung expected electronics should continue to be the export growth leader, and exports of IT products will remain strong. Jewellery exports will be helped by the continuing, albeit slower, global economic rebound, and watches will have steady sales.

However, the outlook for toys is not bullish due to falling birth rates and a growing preference for electronic gadgets.

Spending pattern keeps changing

Mr Leung said higher-income earners in the US are expected to maintain their spending spree on high-end items, and consumers in developed places such as the US, Europe and Japan will look for value-for-money products.

He advised local exporters to take note of this trend and formulate their product and pricing strategies accordingly.

They should also look beyond traditional markets which are highly competitive and focus on the Mainland market.