The economy continued to grow in the third quarter with GDP rising 6.2% in real terms over the same period last year, Acting Government Economist Helen Chan says. This marked the 16th consecutive quarter that GDP growth exceeded the average trend growth.

Mrs Chan said today that with the strong outturn of 6.1% GDP growth in the first three quarters and given the prevailing strength in domestic demand, Hong Kong's economy should be able to attain 6% growth for 2007 as a whole.

Economic upturn: Acting Government Economist Helen Chan says Hong Kong's economy continued to grow in the third quarter with GDP rising 6.2% in real terms.

Export expansion

Merchandise exports grew 6.4% in real terms. While such exports to the Mainland and many other emerging markets held up well, and those to the EU grew further, those to the US and Japan were lacklustre.

Services exports grew 12.3%, reflecting strong inbound tourism, vibrant financial market activities and a continued surge in offshore trade.

Domestic demand played a key role in driving the economy forward. Private consumption spending grew 9.7%, supported by the improving job market and rising household income and wealth.

Overall investment spending expanded, albeit at a slower pace of 2% in real terms. Yet business sentiment in almost all sectors continued to hold up well.

With the economy sustaining strong growth momentum, the seasonally adjusted unemployment rate edged down to 4.1%, the lowest since mid-1998. As labour-market conditions tightened, wages and earnings picked up, and job vacancies continued to surge.

Global uncertainties

The global credit market turbulence in August and September, while causing greater volatility, had only a limited impact on local financial markets. While Hong Kong's economy remains relatively unscathed, the external trading environment has turned more uncertain, and the repercussions of the credit-market turbulence have yet to fully play out.

The US economy, being overshadowed by the housing market slump, sub-prime mortgage problem and tightening credit, is likely to slow more in the coming months. The economic outlook for the EU and Japan is clouded by the uncertainties stemming from the US economy and the evolving global financial market situation, although their economies have continued to expand at a rather solid pace up until now.

The recent surge in oil prices has also added uncertainty to the global trading environment. These factors may have some impact on Hong Kong's trade performance in the fourth quarter.

Yet robust trade growth on the Mainland, the weakening of the Hong Kong dollar against many Asian currencies, strong inbound tourism as well as vibrant financial markets should add support to Hong Kong's exports of goods and services in the near term, thereby offsetting in part the negative impact of weak US demand.

Domestic demand is likely to remain a key driving force in overall economic growth in the fourth quarter. Consumer spending will continue to hold up well in tandem with upbeat consumption sentiment, rising incomes and strong household financial positions. With activity expansion continuing, business investment is poised for further expansion in the months ahead.

Inflation forecast

With the economic upturn in recent quarters, inflation has been climbing gradually. In the first nine months of this year headline CPI inflation averaged 1.5% year-on-year, and underlying inflation 2.5% after netting out the effects of the rates concession and public rental waiver in February.

The headline inflation rate is expected to rise in the fourth quarter, which to a large extent is due to the dissipation of the favourable effect of the rates concession after September, thereby bringing the headline inflation rate back in line with its underlying rate.

Also, higher food prices, the weakness of the US dollar and along with it renminbi appreciation, as well as the recent resurgence in oil prices will lead to a slight pick-up in inflation in the near term.

Yet a sustained rapid rise in labour productivity and continued expansion in productive capacity on the supply side will continue to provide an alleviating effect. For 2007 as a whole, Composite CPI inflation is forecast at 2%.

US economy

When asked about the impact of the US economic downturn on Hong Kong, Mrs Chan said if the US economy shows a bigger-than-expected downturn, the global economy, including Hong Kong, will inevitably be affected.

However, the direct impact should be less severe than before because the dependence on the US as an export growth driver has ebbed significantly over the years, and the Mainland has emerged as an important export market for Hong Kong.

Although the Government is cautiously optimistic about the near-term export outlook, it will keep a close watch over the future economic performance of the US and other external factors.

Mrs Chan said the recent development in the property market is healthy. Noting people's present home purchase affordability is much better than that in 1997, she said the recent rise in property price and transactions is reflecting the accumulated improvement in the economy and people's income.

On the recent capital movement in Hong Kong, the economist said capital flowing into Asian markets has become a global trend. She said the Government will do its best to maintain the market's smooth operation and enhance risk management.