Hong Kong's economy saw further improvement in the third quarter, with Real Gross Domestic Product growing 0.4% over the second quarter. The year-on-year fall in GDP in real terms narrowed to 2.4% from 3.6% in the second quarter.

Positive signs: Government Economist Helen Chan says Hong Kong's economy saw further improvement in the third quarter, with Real Gross Domestic Product growing 0.4%.

Weak exports

Government Economist Helen Chan today said further improvement in the domestic sector offset the drag from weak external demand.

Although the global economy has entered the initial stage of recovery, import demand in the advanced economies remained sluggish and continued to weigh heavily on the exports of Asian economies.

Hong Kong's merchandise exports still declined notably year-on-year in the third quarter, although the pace of decline slowed distinctly towards the end of the quarter. Total exports fell 13.2% in real terms year-on-year in the third quarter.

In contrast, exports of services improved more visibly, supported by further revival in financial market activities and a rebound in inbound tourism. On a seasonally adjusted quarter-to-quarter basis, services exports grew 4.6%. Yet trade-related service exports were still weak under the drag of sluggish trade flows.

Consumption bottoms out

Local consumer sentiments revived further, as economic prospects got better, the labour market stabilised, the Government's relief measures yielded further results, and asset markets remained supportive. The year-on-year change in private consumption expenditure reversed back to a small increase of 0.2%, after falling for four consecutive quarters.

Business sentiments turned up distinctly, with overall investment reverting to a small increase after three consecutive quarters of double-digit decline. Overall investment spending returned to 1.4% growth in the third quarter over a year earlier.

The labour market also showed signs of improvement. The seasonally adjusted unemployment rate fell slightly to 5.3% in the third quarter, the first decline since the onset of the global financial crisis.

Economy expands

Following exceptionally large stimulus measures by governments and central banks to shore up demand and stabilise financial markets, the global economy is finally expanding again.

Despite this, labour markets in many advanced economies continued to worsen. These economies are still confronted by impaired financial systems and an ongoing adjustment process to deleverage and rebuild savings. Yet in Asia, the improvement has been more evident, with the Mainland economy taking the lead in the return to a faster growth path.

With global trade flows still notably down compared to the pre-crisis level, there are indications orders are gradually coming back in recent months and the onset of a modest global recovery and the restocking process should help Hong Kong's external trade.

Domestically, local consumer sentiment should continue to be supported by an improving labour market and the cushion rendered by the Government's relief measures.

The results of the latest Quarterly Business Tendency Survey indicated many large business establishments have turned more upbeat about their near-term business prospects. Public-sector investment should continue apace to shore up aggregate demand, as part of the Government's counter-cyclical strategy in the current global downturn.

Uncertainties remain

Although the downside risks in the external environment seem to have receded for the time being, the global economic outlook in the period ahead remains subject to considerable uncertainty.

The clear risk is that the global recovery could stall after the exceptionally fiscal boost begins to fade out. The "toxic assets" in the US and European financial systems and the deleveraging process to restore health in the banking sector are the main drag on the recovery process.

Another major risk is the timing and pace of the exit strategies by governments and central banks, and the possible fluctuations in asset markets they may cause. The potential rise in protectionist sentiment is another concern.

On inflation, both local and external price pressures are virtually absent, as local costs remain contained and as the supply capacity of the global economy still out-runs demand by a sizable margin.

Deflationary pressure stabilises

The Underlying Composite Consumer Price Index dropped 0.3% in the third quarter from a year earlier, but the underlying deflationary pressure tended to stabilise towards the end of the quarter on a seasonally adjusted basis.

With the development on the price front largely in line with earlier expectations, the forecast headline and underlying consumer price inflation rates remain unchanged, at 0.5% and 0.9% for 2009 as a whole.