Hong Kong’s economy rebounded in the second quarter, benefiting from the faster growth of the Mainland economy and the waning of recessionary forces in the advanced economies.

Following a sharp year-on-year contraction of 7.8% in the first quarter of 2009, real GDP registered a smaller decline of 3.8% in the second quarter. On a seasonally adjusted quarter-to-quarter comparison, the economy resumed growth at 3.3% in the second quarter, ending the contraction in the previous four quarters, according to the preliminary figures on Gross Domestic Product (GDP) for the second quarter of 2009 released on August 14 by the Hong Kong Special Administrative Region Government.

Commenting on the rebound, Hong Kong Financial Secretary, Mr. John C. Tsang said, “I am glad to see the economy resuming growth in the second quarter on a quarterly basis, reversing the contraction in the preceding four quarters.”

Mr. Tsang said that thanks to the strong and forceful stimulus measures by the Mainland Authorities, the Mainland economy has regained faster growth momentum, thereby benefiting the Hong Kong economy. Equally important has been the confidence exhibited by the Hong Kong people despite the tremendous shocks of the global financial tsunami, which has underpinned the relatively stable local consumption.

“I am glad that the strategy of the Government to stabilize the financial system, support enterprises and preserve employment has yielded positive results in supporting the economy and helping to slow the rise in unemployment.”

Mr. Tsang added, “We are seeing encouraging signs of an economic recovery and the economy will hopefully improve further in the second half of the year. For 2009 as a whole, the forecast for the economy is now revised upward to a contraction of 3.5-4.5%.”

However, he pointed out, “As the global economy is still subject to uncertainties, we cannot afford to be complacent. While continuing with the strategy of stabilizing the financial system, supporting enterprises and preserving employment, the Government will remain vigilant and make timely moves in response to the evolving external situation.”

With the external environment improving relatively, Hong Kong’s total exports of goods declined notably less year-on-year in the second quarter, and actually picked up strongly from the first quarter on a seasonally adjusted basis. Hong Kong’s export performance continued to fare relatively better than many other Asian economies in the second quarter.

Exports of services also showed a smaller year-on-year rate of decline in the second quarter, helped by the rebound in financial market activities and the stabilization in the global trading environment. The spread of the human swine flu, however, weighed on inbound tourism.

Local consumer sentiments recovered during the quarter under the combined effects of more stable employment conditions, rebound in asset markets and the boost from the various rounds of relief measures by the Government. The year-on-year decline in private consumption expenditure tapered significantly in the second quarter, with a distinct pick-up on a quarter-to-quarter basis. Nevertheless, business sentiments remained cautious given the still uncertain global economic outlook, leading to a further notable year-on-year decline in investment.

Labor market displayed much resilience. In tandem with the relative improvement in the economy, total employment stabilized in the second quarter, thereby helping to slow the pace of increase in unemployment rate. In the second quarter, the seasonally adjusted unemployment rate was 5.4%.

Following the strong policy actions taken by governments around the world, the global economy is finally taking some breather after a dismal first quarter. In Asia, with the stimulus measures successively in place, the Mainland economy regained much strength by the second quarter, thereby providing an anchor in the region. Many other Asian economies have also shown different extents of relative improvement. With the global economy gradually bottoming out and the Mainland economy back to faster growth, Hong Kong's external sector is poised for some further improvement in the second half of 2009.

Locally, consumption in the coming quarters should continue to benefit from lesser job loss, low interest rates and the boost from the several rounds of Government's relief packages. Nevertheless, business sentiments, though also somewhat better than at the beginning of the year, are still cautious. In the coming quarters, private sector investment is likely to remain depressed. But public sector investment should pick up further to provide a partial offset to the slack in its private sector counterpart, reflecting the Government's pursuit of counter-cyclical strategy to mitigate the impact from the global downturn.

With the stronger-than-expected rebound in the second quarter, the gradual bottoming out in the global economy, and also taking into account the boost from the Government's additional relief measures announced on 26 May, GDP for 2009 as a whole is now forecast to contract by 3.5-4.5% in real terms, up from the forecast decline of 5.5-6.5% in the May round.

While Hong Kong is seeing light at the end of the tunnel, the economic outlook remains highly uncertain. For a small open economy like Hong Kong, a sustained and solid recovery still hinges on a visible improvement in the external environment. The impact of the human swine influenza is another risk factor. Locally, asset market gyrations could occur if the global recovery process turned out to be unsteady and weaker-than-expected. Also, the strength of recovery in the domestic sector will hinge on the evolving employment and income situation. In short, the recovery path ahead can still be rather bumpy.

On the price front, the underlying consumer price inflation eased to 1.2% in the second quarter, as both local and external price pressures were virtually absent in the midst of the global recession. With import prices now falling and local costs also receding, it is not unlikely that consumer price inflation may turn slightly negative in the coming months. Taking into account the actual outturn in the first half of 2009, for the year as a whole, underlying consumer price inflation is forecast at 0.9%, same as in the May round. Taking into account the effects of the relief measures announced on 26 May 2009, the headline consumer price inflation for 2009 is forecast at 0.5%, revised downward from that of 1% in the May round.