Hong Kong's economy suffered a heavy blow in the first quarter with GDP falling 7.8% after a 2.6% drop in last year's fourth quarter, the Census & Statistics Department says.

Taking into account the considerable markdown in the world economic outlook, GDP for 2009 as a whole is now forecast to contract up to 6.5% in real terms, down from the forecast decline of up to 3% noted in the Budget.

The latest GDP forecast is subject to an unusually large degree of uncertainty from the still evolving global financial and economic environments, the department said, adding the outbreak of the human swine influenza in North America has also emerged as a new source of uncertainty.

The expected pick-up in the Mainland economy, the recent rebound in global stock markets, and the relative improvement in economic sentiment both in the US and Europe have provided a glimpse of light at the end of a long tunnel, it said. However, a strong recovery is not yet in sight.

Feeling the crunch: Financial Secretary John Tsang says first-quarter GDP fell 7.8%, adding GDP for 2009 as a whole is now forecast to contract by 5.5% to 6.5% in real terms.

Relief in the pipeline

Speaking at a press conference this afternoon Financial Secretary John Tsang said a new package of measures will be announced in a month to relieve hardship, stimulate economic activity and help people weather the financial storm.

"The new round of measures will directly benefit the community. We aim to secure funding approval before the recess of the current Legislative Council session. I will announce further details once this work is completed," he said.

"There is no need to be overly pessimistic about the latest economic indicators. Hong Kong's financial system remains sound and our economy is in relatively good shape compared to many others. Working together I am confident we would be able to ride out the storm."

Mr Tsang said Hong Kong may be experiencing the worst period now and should see better performance in the second half of the year.

Poor Q1 form

The marked deterioration in first-quarter performance was due to an unprecedented fall-off in world trade as the world plunged into the most severe recession since World War II.

Hong Kong's merchandise exports faced the double blow from a sharp plunge in global demand and an acute fall-off in intra-regional exports which were closely tied to demand in advanced economies.

Total goods exports fell 22.7% in the first quarter over a year earlier, the largest decline since the second quarter of 1954. Services exports dropped 8.2%, similarly hit by the plunge in global and regional demand.

Inbound tourism nevertheless stood out as the bright spot thanks to the increase in Mainland visitors, partly helped by the liberalisation measures under the individual visit scheme.

Consumption, investment

Private consumption expenditure fell 5.5% when set against the very high base of comparison in the same quarter last year. Yet the quarter-to-quarter fall actually tapered. This reflected the improvements in local stock and property markets during the quarter - and possibly the stimulus from several rounds of packages announced since last year.

Overall investment remained sluggish, down by 12.6% in the first quarter over a year earlier.

The labour market continued to adjust to the economic downturn through downsizing and wage cuts. The unemployment rate rose to 5.2% in the first quarter.

Positive signs

As both local and external price pressures receded, consumer price inflation continued to decline. The underlying inflation rate eased to 3.1% in the first quarter, from 5.4% in the fourth quarter last year.

Amid the difficult external environment, Hong Kong's exports of goods and services are likely to remain sluggish in the near term. Nevertheless, with the prospect of global contraction stabilising somewhat after the exceptional fall-offs earlier on, Hong Kong's external trade should see some relative improvement later in the year.

More importantly the Mainland economy is poised for a pick-up in growth, with massive stimulus measures in place and a revival in both export orders and production activities.

Domestically, consumer spending may remain moderate, but the recent rebound in the local stock and housing markets, and distinctly low interest rates, should hopefully render support to a relatively more stable local environment.

Investment, though, is expected to remain depressed until the local economy shows clear signs of turnaround.

Price pressures

On the inflation outlook, as an integral part of cost and price adjustments in an economic downturn, price pressures from both the external and domestic fronts are rapidly receding and are expected to come down further in the months ahead.

Factoring in the actual outturn in the first quarter, the forecast rate of increase in the headline Composite CPI for 2009 is marked down to 1% from 1.6% in the Budget.

The corresponding forecast underlying inflation rate has been revised accordingly to 0.9%, from the earlier forecast of 1.5%.