The economy continued to grow in the first quarter, with GDP rising 5.6% in real terms, Acting Government Economist Helen Chan says. This marked the 14th consecutive quarter that GDP growth exceeded the average trend growth.

Continuous growth: Acting Government Economist Helen Chan says the economy continued to grow in the first quarter, with GDP rising 5.6% in real terms.

Mainland might

External trade still fared well in the first quarter, as the Mainland's thriving trade flow and strong domestic demand cushioned the continued slack in the US market.

Merchandise exports grew 8.2% in real terms. Bolstered by the surge in exports of financial and business services and the expansion of both offshore trade and inbound tourism, exports of services rose 8.4% in real terms.

With rising labour income and the wealth effect stemming from the buoyant performance of the stock market, private consumption expenditure grew 5.6% in real terms. Overall investment spending grew by 3.9%, after several quarters of notable growth.

The economic upturn continued to give rise to a stronger demand for labour, pushing the seasonally adjusted unemployment rate lower to 4.3% in the first quarter.

Future uncertainties

Although the global economy is able to sustain strong growth momentum, there are uncertainties that warrant a close watch over, Mrs Chan said.

"The most notable downside risk is the possibility of a sharper-than-expected US downturn, for its ramifications to the rest of the world. Along with an uncertain US outlook, there may also come bigger volatility in the global financial markets, especially given the lingering structural problem of global imbalances."

However, continuous economic expansion in Europe and Japan may fill the gap from a slowing US economy, and the vibrant Mainland economy will continue to be a plus factor for Hong Kong.

"Even though there is concern about further macro tightening measures, these are intended to forestall the risk of overheating and steer the Mainland economy towards a steady and more sustainable high-growth track. Also, the weakness of the US dollar should generally bode well for Hong Kong's export competitiveness. The still abundant liquidity in the local banking sector is another positive factor which should support continued business expansion.

"Domestic demand is expected to hold firm and take up a bigger role as a growth contributor. Improving employment incomes and the positive economic prospects will continue to render support to private consumption. Vibrant business activity and the prevailing upbeat business sentiment should augur well for continued investment growth in the coming quarters."

Inflation forecast

Mrs Chan said tighter labour market conditions, the weakness of the US dollar and renminbi appreciation will see cost pressure creep up.

"Yet the upturn in Composite CPI is likely to proceed still at a rather modest pace, being cushioned by concurrent growth in labour productivity. Various one-off factors including the rates waiver for two quarters, the public housing rental cut to be implemented later this year, and the implementation of the Pre-primary Education Voucher Scheme will also bring down the Composite CPI level."

With the actual outturn of consumer price inflation so far in line with expectations, the forecast rate of increase in the Composite CPI for 2007 is unchanged at 1.5%.

Mainland stock market

This is a risk the Government will stay alert to, the economist said, adding that investors should assess the risk before making investment decisions.

The expansion of the scope of the Qualified Domestic Institutional Investors Scheme will provide an alternative investment channel to meet the huge demand of Mainland investors for quality investments, and will help divert funds out of the Mainland to alleviate the pressure caused by excessive liquidity, she added.