Cites increased local consumption, external demand as drives

HONG KONG: Local banking giant Hang Seng Bank has forecast that the city's economy will shift to a 3.5 percent expansion this year from a 3.0 percent contraction last year, driven by stronger domestic consumption and recovering external demand.

The local economy is likely to have resumed year-on-year expansion during the fourth quarter of last year, as suggested by most of the recently-released data, after contracting for four consecutive quarters, the bank said in its monthly economic review.

The unemployment rate has trended lower, while the growth in retail sales has accelerated, and exports improved, it said.

The city's jobless rate fell to 4.9 percent during the three months to December, which was the fourth consecutive decline since the start of the global financial crisis, the government said last month.

The improving labor market and the positive wealth effects from the booming asset markets has helped boost consumer confidence.

Retail sales expanded strongly by 12.8 percent in the last quarter of 2009, against a decline of 3.4 percent in the first three quarters, taking total sales value back to 2008 pre-crisis levels.

Supported by stronger domestic demand, the Hong Kong economy is likely to have returned to positive year-on-year growth in the final quarter last year after contracting 4.6 percent in the first three quarters, the bank suggested.

"We see the economy expanding 1.6 percent in the final quarter," Hang Seng Bank Chief Economist Joanne Yim and Senior Economist Irina Fan said in the report.

This would imply a contraction of 3.0 percent for the full year of 2009, which would be the Hong Kong economy's worst annual performance since 1998, when it was hit by the Asian financial crisis.

The government is set to release its fourth quarter economic report on February 24.

Looking ahead into 2010, the Hang Seng also expects a gradual recovery in external demand to provide additional steam for the city's economic growth. "While domestic demand has been taking the lead in the recovery, exports are also gathering momentum," they said.

The city's exports reverted to growth in the last two months of 2009, rising 1.3 percent and 9.2 percent year-on-year, respectively, after contracting for a year.

"External demand is likely to recover, as the advanced economies are expected to rebound to positive growth in 2010 from a contraction in 2009. But, it may still take some time for global demand to resume their pre-crisis levels," they said, citing as a factor the increased frugality of US consumers after the financial crisis.

"As such, although the Hong Kong economy may still be underpinned by steady increases in domestic demand, we forecast only a sub-par growth of 3.5 percent this year for the trade-dependent local economy," the economists said.

The bank warns of potential inflationary pressure ahead. While economic growth looks likely to be tepid, inflationary pressure is building from rising global food and commodity prices, as the city relies heavily on imports, it notes.

Consumer prices could rise by an average of 3 percent this year from 0.5 percent last year, it estimates.

(HK Edition 02/09/2010 page4)