External environment

Although the global economy continued to show a strong performance in Q1, the economist said the external environment is still clouded by downside risks like recent hikes in oil prices, rising US interest rates, avian flu, global trade imbalances and tightening measures on the Mainland.

"Some of these risks have intensified recently. How these various risk factors will play out is critical to Hong Kong's trade and economic performance in the coming quarters," Mr Kwok said.

"As the prospects for the global economy are still largely positive, there could be some upsides from the external side. However, in view of the wide range of uncertainties still prevailing in the external environment as well as the recent volatilities in the international financial markets, it is more prudent to maintain the forecast GDP growth for 2006 unchanged at 4% to 5% in the present round."

The economy in Q1 expanded on a broad front, driven by robust external trade, distinct pick-up in consumer spending, and a continued surge in investment in machinery and equipment.

Merchandise exports

Merchandise exports grew 14.4% in real terms over a year earlier, thanks to surging intra-regional trade, with the Mainland as the key growth driver. Exports to the EU and the US also fared well. Exports of services rose 8.9% in real terms in Q1, with both offshore trade and inbound tourism growing further. 

On the domestic front, spending on private consumption grew 4.5% in Q1, supported by  improving employment incomes, a stronger household balance sheet along with higher share prices and a reviving property market. Consumer sentiments remained upbeat, even though interest rates rose further during the quarter.

Overall investment spending rose 8.5% in real terms. Expenditure on machinery and equipment remained the key growth driver, with 23.3% growth, supported by higher corporate profits, briskly expanding business volume and a sanguine economic outlook. Yet building and construction activity was still the laggard.

Labour market conditions continue to improve, with the seasonally adjusted unemployment rate falling to 5.2% in Q1 and further to 5.1% in February-April.

Since 2003, some 240,000 additional jobs have been created. The number of long-term unemployed has also come down, indicating that many of those who had difficulties in finding jobs in the past are now being absorbed back into the labour market gradually.

Consumer price inflation remained benign, running at 1.6% year-on-year in the first quarter. The successive rises in private housing rentals over the past two years have begun to creep into consumer prices to a greater extent. Yet inflationary pressure has been mitigated by the easing in import prices of food and consumer goods.

Despite rising rentals and wages, the cost pressure from these two cost elements was not that significant when viewed against the concurrent surge in business turnover and also the rapid labour productivity growth stemming from the hefty investment in machinery and equipment.

On the near-term economic prospects, locally, consumption looks set to hold up rather well, along with better job prospects and rising employment incomes.

Construction weak

Investment in plants and equipment seems likely to increase further in tandem with the much improved corporate profits and also to cater for the growth in business. But construction is likely to remain weak in the near term, thereby capping the upside of overall investment. 

Meanwhile, consumer price inflation, though creeping up, is likely to be still at a moderate and healthy level for 2006 as a whole.

To take on board the release of the new 2004-05-based Composite CPI series, which is on average about 0.4 of a percentage point lower than the old 1999-2000 series, the forecast rate of increase in the Composite CPI for 2006 as a whole has been revised from 2.3% to 2%.

For the forecast rate of change in the GDP deflator, it is unchanged at 0.5%.

Pegged rate

Mr Kwok said the Government will not change its policy of pegging the Hong Kong dollar to the US dollar.

When asked whether recent renminbi appreciation will affect Hong Kong, he said it will not have a great impact on Mainland or Hong Kong trade because the degree of appreciation is relatively small compared with other Asian currencies.

On the Mainland's recent tightening measures, Mr Kwok said they mainly target investments in cement and steel. As those sectors are not closely related to Hong Kong's economy, their impact is limited.