The economy grew moderately in the second quarter with GDP rising 4.2% after a 7.3% surge in the first quarter, Government Economist Kwok Kwok-chuen says. Further moderation is expected for the rest of the year.

Taking into account the 5.8% economic growth in the year's first half together with the global economic slowdown and inflation, the GDP forecast for the whole year is unchanged at 4%-5%.

Mr Kwok said today the moderation after a prolonged period of robust economic expansion shows the drag the advanced economies' slowing growth and lingering financial market turbulence is having on Asia's economic growth.

Cool down: Government Economist Kwok Kwok-chuen forecasts the local economy will continue to moderate, with second quarter GDP growth slowing to 4.2%.

Exports up

Total goods exports grew moderately by 4.4% in real terms in the second quarter, as merchandise exports fell in June amidst the increasingly challenging external environment.

Services exports rose 7.1%, notably in real terms, but the performance was not as upbeat as previously with the impact on financial service activities due to ongoing turbulence in global financial markets becoming more evident.

Domestic demand also saw slower growth with private consumption spending rising 3.1% in real terms. The stock market correction, rising inflation and dimmer global economic prospects may have dented consumer sentiments, Mr Kwok said.

Investment spending expanded 4.3% despite the high base in the same quarter last year. The latest survey results showed large business establishments were still generally positive about near-term business prospects.

Labour market conditions remained firm in the second quarter. The seasonally adjusted unemployment rate stayed at a 10-year low of 3.3% and the underemployment rate was stable at 1.9%, with labour earnings and wages on the rise.

Rising inflation

Inflationary pressure continued its upward trend in the second quarter with headline consumer price inflation rising to 5.7%. The food price surge amidst global food inflation contributed significantly to the recent pick-up in consumer price inflation.

Pressure from the demand side after a prolonged period of economic expansion was also reflected in the faster rise in property rents and prices for other goods and services.

After netting out the effects of one-off policy measures, underlying consumer price inflation also stood at 5.7% as the alleviation effect of the rates concession in the second quarter was offset by similar measures implemented in the same quarter last year.

Mr Kwok said the external environment facing the city will become increasingly challenging due to the expected moderation in global economic growth, lingering global financial turbulence and the negative effect on demand in Hong Kong's major markets because of high commodity prices.

Rising inflation among the Asian economies is also posing a greater threat to economic prospects in the region. The Hong Kong dollar exchange rate and commodity prices are also among various factors that may affect the economic situation in the second half, he said.

Labour support

Domestic demand will slow during the rest of the year as external growth recedes. But firm labour market conditions and business confidence will continue to support local consumption and investment spending.

While global food prices and international oil prices remain high, inflationary pressure from the external and domestic fronts, including rents, the improvement in labour productivity and the expected economic moderation ahead should provide some alleviating effect.

Taking into account the faster-than-expected food price hike in the first half of the year, Mr Kwok said the forecast rate of increase in the year's underlying CPI is revised upward from 4.5% in the May round to 5.5%.

However, he noted the relief measures announced in the 2008-09 Budget and by the Chief Executive in mid-July will help lower headline inflation notably in the latter part of the year. The forecast headline inflation rate for 2008 is now 4.2%.