The economy continued to grow in the first quarter with GDP rising 7.1%, despite the growing adversities in the external environment, Government Economist KC Kwok says. This marked the 18th consecutive quarter that GDP growth exceeded the average trend growth.

Mr Kwok said given the uncertainties prevailing in the external environment and dimmer global economic prospects, the GDP forecast at 4%-5% as announced in the Budget is kept unchanged.

With the strong GDP growth in the first quarter, and barring any abrupt external shocks, it is likely GDP growth in 2008 should be close to the upper end of the forecast range.

Economic upturn: Government Economist KC Kwok says Hong Kong's economy continued to grow in the first quarter with GDP rising 7.1%

Export expansion

Total goods exports grew 8.3% in real terms in the first quarter, supported by the vibrant performance of the Mainland and other emerging economies and the expansion of the EU market.

Services exports also rose 10.8% in real terms on the back of a continued surge in financial services, as well as notable growth in offshore trade and inbound tourism.

Domestic demand played a key role in driving the economy forward. Private consumption spending rose 7.9%, underpinned by the firm labour-market conditions and rising incomes. Overall investment grew 8.9% with a rebound in building and construction activity.

However, amid dimmer global economic prospects, the local stock market experienced further consolidation in the first quarter and the housing market turned less hectic.

Labour market conditions continued to be firm in the first quarter. The seasonally adjusted unemployment rate stood at 3.4%, and the underemployment rate fell to a 10-year low of 1.9%. Labour earnings and wages were on the rise.

Consumer price inflation picked up, mostly due to the surge in food prices amid the global food inflation. Headline CPI inflation averaged 4.6% in the first quarter. After netting out the one-off effects of the rates concession this year and the public housing rental waiver last year, underlying CPI inflation was 4.9%.

Global uncertainties

Mr Kwok said the external environment will remain uncertain and challenging. "The US economy will continue to be weak with the effects of the housing market downturn spreading into the wider economy, while global financial markets are likely to remain unsettled. Economic activities in other major advanced economies have also showed signs of deceleration."

The growth momentum in the emerging and developing economies, including the Mainland economy, is expected to remain vibrant, while there should be some mild moderation in growth due to the weaker demand from the advanced economies.

This should provide some cushioning effect on the impact on Hong Kong from the developed world's economic slowdown in the coming quarters.  

Domestic demand is expected to grow and remain a key driver in economic growth. The firm labour market conditions and rising incomes should continue to fuel private consumption.

As business confidence holds up well and interest rates remain low, there should also be growth in investment spending in the rest of the year.

Inflation forecast

Mr Kwok said the inflation outlook is also uncertain and will hinge on the movements in food prices in the international markets in the rest of the year, which can be expected to be volatile.

Apart from global food prices, the elevated international oil prices, the exchange-rate movements as well as the strength of the local economy are likely to continue to exert inflationary pressure. Nevertheless, the sustained increase in labour productivity will provide some offsetting effect.

Due to the high degree of uncertainties in the external environment, the forecast rate of increase in the underlying CPI for 2008 is maintained at 4.5%. The corresponding forecast headline inflation rate is also unchanged at 3.4%.

"The risks to these forecasts are on the upside. The Government will review the inflation forecast as more incoming data become available," the economist said.

Optimistic outlook

Mr Kwok said although there are some global uncertainties that may affect Hong Kong's economy, he is cautiously optimistic about the Hong Kong's future economic development because of the strong domestic demand and the rapid growth of the Mainland and other emerging economies.

When asked whether Hong Kong will continue to record strong economic growth in the coming months, Mr Kwok said the economy cannot continue to grow at such a rapid rate for a prolonged period because it would create tremendous inflationary pressure. It is healthy to have a gradual slow-down in the economic growth rate, he added.

On the recent Sichuan earthquake, he said it is necessary to pay attention to the actual loss incurred in the disaster and how the reconstruction work will proceed. However, he said the quake would unlikely to have a significant impact on the Mainland's and Hong Kong's economy because China is a big country and Sichuan is an agricultural province.