Update on the Hong Kong Economy for The Task Force on Economic Challenges Government Economist

1. Update on the Hong Kong Economy for The Task Force on Economic Challenges Government Economist 22 June 2009

2. Global recession deepened more than expected Q1, but signs of stabilisation emerging

3. External environment worsened more than expected in the first few months

4. US economy showing signs of stabilisation …

5. … but a sustained recovery not yet in sight

6. Economic sentiments in EU and Japan improved, but activity still lacklustre

7. China’s economic situation turned better

8. HK economy heavily hit by collapse in world trade in Q1…

9. GDP plunged by 7.8% in 2009 Q1, amidthe fall-off in external demand

10. Exports plunged but orders improving

11. Retail sales showing a relative improvement

12. Results of Business Tendency Survey,as a leading indicator, improved

13. Results of latest Business Tendency Survey (Large firms) Source : Quarterly Business Tendency Survey, C&SD.

14. Unemployment rate stabilised for the first time after rising for eight consecutive months

15. Total employment number also registered its first increase Notes: (1) The trading sector includes import/export trades and wholesale trade. (2) The logistics sector includes freight transport, storage, postal and courier services. (#) Difference in employment in the 3-month ending the reference month as compared to the 3-month ending the month before.

16. Loan demand remains weak but credit access improves

17. How does HK fare relative to other advanced Asian economies?

18. Many other Asian economiessaw even larger declines in GDP

19. Export performance better than many in Asia

20. How does the current crisis compare with the 1997-98 Asian Financial Crisis?

21. World GDP has contracted much more severely during the current crisis

22. Asian exports more hard hit during the current crisis

23. Hence the fall in Hong Kong’s exports was also severe this time

24. Stock market plunged during both crises

25. But housing market fared much betterthis time

26. Interest rates are very accommodativethis time

27. Labour market more resilient withless job loss

28. Effectiveness of Government’s relief measures

29. Several rounds of relief measures have rendered some support to the economy • Discretionary relief measures announced since last year amounted to some $87.6 billion, or 5.2% of GDP. • These measures taken together would raise GDP by about 2 percentage points this year alone • Some 8 600 firms benefitted from the Loan Guarantee Schemes, involving loan amount of over $22.7bn, and helping to secure the jobs of around 160 000 people • Consumer sentiment held relatively firm and cumulative job loss much less than during AFC • Important to adhere to fiscal prudence and return to balanced budget over the medium term

30. 2009 Updated forecasts

31. GDP forecast for 2009 marked down: -5.5% to -6.5% • Contraction in the first quarter bigger than expected • Significant mark-down in world GDP forecast since Feb 2009 • External sector in near term still under the severe drag of plunging global trade flow, yet with prospect of relative improvement later this year

32. Recovery path possibly still bumpy ... • Risk of global financial market showing renewed volatility; credit markets still not functioning properly • Negative feedback between the financial markets and the real economy • Uncertainties about impact of the human swine influenza

33. Outlook for 2009: Positive factors • Signs suggesting the pace of global economic contraction will slow in the coming quarters • Weaker dollar will help exports • Relative improvement in economic sentiment in US and Europe • Mainland economy poised for a faster growth • Low local interest rates

34. Private sector analysts’ forecasts for Hong Kong in 2009

35. End