HK’S ECONOMY SET FOR STRONG REBOUND

While delivering his Budget speech today, Financial Secretary Paul Chan announced that Hong Kong’s economy will rebound via abundant opportunities as the city capitalises on its distinct advantages under the “one country, two systems” principle.

In his speech, he first addressed the matter of Hong Kong’s economic situation in 2022 and why the external environment deteriorated markedly during that time.

Mr Chan explained that with the Russia-Ukraine conflict driving up international energy and commodity prices and rampant global inflation, major central banks sharply tightened their monetary policies, posing a drag on the performance of advanced economies. The Mainland’s economic growth also slowed amid the subdued global economy and the fluctuating COVID-19 epidemic situation.

He said: “Amid moderated growth across major economies, decelerated growth in manufacturing and trading activities in Asia as well as the continued disruptions to cross-boundary truck movements between Hong Kong and the Mainland caused by the epidemic, Hong Kong’s total exports of goods posted a notable decline of 13.9% in real terms last year.

“As for trade in services, exports of transport services and financial services both declined. Exports of travel services recorded a surge alongside the progressive relaxation of quarantine requirements for visitors, but remained far below the pre-epidemic level. Total exports of services declined mildly by 0.9% for the year as a whole.”

On the domestic front, Mr Chan pointed out that the outbreak of the fifth wave of the epidemic early last year and tightened financial conditions weighed heavily on domestic demand.

Still, he said with the local epidemic situation stabilising, and the Government’s counter-cyclical measures and disbursement of consumption vouchers making key impacts, employment conditions continuously improved.

“Private consumption expenditure has gradually revived since the second quarter, but still recorded a drop of 1% for the year as a whole. Dampened by the subdued economic outlook and rising borrowing costs, overall investment expenditure fell by 8.5%.

“With both external and domestic segments hit hard, the Hong Kong economy contracted by 3.5%in 2022. Nevertheless, the labour market showed improvement, with the seasonally adjusted unemployment rate declining gradually to the latest 3.4% after rising to 5.4% early last year. 

“Inflation remained moderate in overall terms. While prices of individual items such as food, energy, and clothing and footwear recorded more notable increases, price pressures on other major components were largely contained. Private housing rentals also fell. Netting out the effects of the Government’s one-off measures, the underlying inflation rate was 1.7% for last year as a whole.”

Dampened by factors including tightened financial conditions, slackened global growth and heightened geopolitical tensions, Hong Kong’s stock market continued to correct during most of last year and trading activities shrank, Mr Chan noted.

Be that as it may, he said amid market expectations of a slower pace of interest rate hikes among major economies and an accelerated return of the local economy to normalcy, the Hang Seng Index rebounded strongly by the end of the year.

“The residential property market underwent a marked correction last year. Flat prices dropped by 15.6% during the year. The number of transactions plunged by almost 40% to a low level of about 45 000. The non-residential property market also turned quiet.”

Mr Chan also outlined Hong Kong’s economic outlook for 2023 and the medium-term outlook.

He said: “The market generally expects that the negative impact on the global economy of the sharp tightening of monetary policies by major central banks will become more apparent this year. Heightened geopolitical tensions will also add to the downside risks.

“Last month, the International Monetary Fund forecast that global economic growth would slacken further to 2.9% this year.”

Apart from emphasising that sluggish external demand will continue to affect the Mainland’s exports this year, Mr Chan said the Mainland’s economy is resilient and has solid fundamentals.

On the upside, as economic activities quickly revive from the epidemic and the various economic stabilisation measures implemented over the past year gradually yield results, the growth of the Mainland’s economy is expected to accelerate visibly.

At the same time, he stressed that the economic growth of the US and Europe is expected to decelerate further this year. 

“The market anticipates that US interest rates will rise further in the first half and stay elevated for some time, which is expected to further dampen demand. For the Eurozone economy, economic sentiment remained subdued. The pace of economic growth will soften notably due to the continued impact of monetary policy tightening and the Russia-Ukraine tension.”

The finance chief stated that given the further weakening of growth momentum in advanced economies, Hong Kong’s exports of goods will still face severe challenges this year. However, the accelerated growth of the Mainland economy coupled with the lifting of restrictions on cross-boundary truck movements should alleviate part of the pressure. 

He revealed good news for exports of services, saying with the removal of quarantine requirements for inbound travellers and the normal cross-boundary travel between Hong Kong and the Mainland, the number of visitor arrivals is expected to see a strong rebound.

Domestically, as overall economic sentiment improves in tandem with the revival of economic activities and the rapid return of Hong Kong’s exchanges with the Mainland and the world to normalcy, private consumption will increase, Mr Chan emphasised.

“Having regard to the above factors, I forecast that the Hong Kong economy will see a visible rebound this year with growth of 3.5 to 5.5% for the year as a whole.

“In respect of prices, domestic cost pressures will increase alongside the economic recovery. Despite some moderation, external price pressures will remain notable this year. Taking all factors into account, I forecast that the underlying inflation rate and the headline inflation rate will rise to 2.5% and 2.9% respectively this year.”

In the medium to long term, the Financial Secretary made it clear that Hong Kong’s economy will see abundant opportunities as the city capitalises on its distinct advantages under the “one country, two systems” principle.

“Hong Kong’s advantages under “one country, two systems” are unique. Besides, the current-term Government strives to forge a better integration of a capable government and an efficient market, proactively strengthening competitiveness, identifying new impetus for growth and expanding economic capacity.

“Considering all the above factors and taking into account the catch-up growth in the initial period arising from the continued return of economic activities from the epidemic to normalcy, I forecast that the Hong Kong economy will grow by an average of 3.7% per annum in real terms from 2024 to 2027, higher than the trend growth of 2.8% during the decade before the epidemic.”

He added that the underlying inflation rate is forecast to average 2.5% per annum.

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