Growing inflation and fewer exports to the United States will result in Hong Kong's economy seeing a 5 percent growth this year, a new Citibank study forecasts.

The growth is expected to slow slightly next year to 4.6 percent.

But despite a similar impact from fewer exports to the US, the mainland economy is still expected to grow by 10 percent both this year and next year thanks to soaring domestic demand, the bank said.

The report says Hong Kong's economic growth will drop to 3.1 percent in the fourth quarter this year, down from 7.1 percent in the first quarter.

Catherine Cheung, head of investment strategy and research at Citibank Global Consumer Group, said the growing inflation and weak exports are primarily to blame for the big growth early in the year.

She said the Hong Kong Purchasing Manager's Index (PMI) has stayed near 50 during the last four months, as the city's exporters have received smaller orders and companies are grappling with accelerating costs.

The PMI is an indicator of economic health, based on new orders and supplier deliveries. A PMI of more than 50 represents business activity expansion, less than 50 signifies a contraction, and being right at 50 indicates stagnation.

The Hong Kong Interbank Offered Rate (HIBOR) - an interest rate on the lending and borrowing between banks in the Hong Kong interbank market - is expected to increase to 2.75 percent by the end of 2008, Citibank said.

"The market correction will continue until July, when listing companies start announcing their first-half results," Cheung said. "Only then will the market have a clearer trend, which will be based on companies' profitability.

"Moreover, the uncertainties may ease after the Olympic Games in August, because the economic regulatory policies from Beijing are expected to be clearer by then."

Global economy

Citibank predictes the global economy will grow by about 3 percent this year and next, compared with last year's 4 percent, due to slowdowns in developed countries, which look to see a growth of just 1.6 percent this year. Emerging markets, with their average growth of more than 6 percent this year and next, will be the major drivers of the global economy.

That doesn't make them immune to problems though. Energy and food cost a lot in emerging markets, and those high prices mean high inflation - an average of 8.5 percent, Citibank says.

(HK Edition 06/27/2008 page2)