SINGAPORE, Dec. 15 (UPI) -- Hong Kong has enjoyed a year of strong economic growth, supported by both domestic and external drivers. But with the global economy facing many uncertainties in 2005, the territory will need to sustain consumer confidence if it wants to maintain its growth momentum going forward.
The economy grew 7.2 percent year on year in the third quarter, supported by a rebound in tourism, and the official government forecast for the year is 7.5 percent, although many private economists believe growth could actually come closer to 8 percent.
Though the territory's open economy makes it vulnerable to U.S. economic prospects and America's slowing demand for Asian products going into the New Year, mainland China may have an even greater influence on next year growth in Hong Kong.
So far the apparent soft landing in the Mainland bodes well for the territory, even though a more severe downturn in China can not be excluded next year and would of course have great ramification for the territory.
Economists point to the strong correlation between Chinese trade growth and Hong Kong's broad economic expansion. Chinese visitors are expected to make up approximately 60 percent of the 20 million total arrivals this year, which has been a significant boost to hotels, restaurants and the retail sector. This influx of mainland visitors is likely to persist, especially with the expected opening of the Disney theme park in September 2005.
"Given this close relationship between Hong Kong and the Mainland, in both trade and business links, Hong Kong will be one of the hardest hit in Asia if China is forced into a hard-landing," notes Tai Hiu, economist at Standard Chartered.
Economists agree the territory's growth will stabilize at a more sustainable pace in 2005.
In a recent report, Bank of China (Hong Kong) predicted economic growth of 4.5 percent in 2005, after an in-house forecast of 7.8 percent for this year.
Tai is forecasting GDP growth to halve in 2005 to 4 percent, compared with a forecast of 8 percent in 2004.
CSBF also recently raised its growth forecast to 8 percent% for this year and 4.4 percent for next year, while DBS Bank is even more bullish expecting growth at 5.2 percent in 2005.
The Singaporean bank said his optimistic forecast was based on expectations local interest rates will further decouple from U.S. rates, while the ongoing pressure on the renminbi will lead China to further open up its capital account with a bias on the outflow side, thereby diverting more domestic capital to Hong Kong.
While domestic consumption and investment growth should remain supported by China's economic expansion as it relaxes further control on overseas investments and moves to a more market-oriented foreign exchange policy, the plateauing consumer confidence will need fresh impetus.
Hong Kong's domestic demand has improved considerably in the past year with consumer sentiment strengthening and unemployment finally falling.
With demand for labor steadily growing with the addition of 85,000 jobs since October 2003, the unemployment rate has fallen from 8.7 percent in July 2003 to 6.4 percent in October 2004. Bank of China is actually predicting the jobless rate may decline even further to 5.8 percent towards the end of next year.
Yet with the broad expansion taking a more moderate path, labor demand growth is likely to slow, Tai said, adding that another related issue was income growth, which has been tame reflecting slack in the job market.
"Hence, consumer sentiment is likely to be supported, but it may have reached its peak," he noted.
After months of deflation, inflation has finally returned.
Retail sales growth surprised on the upside in October, reflecting the
sustained strength of local sentiment.
Meanwhile, the number of property transactions rose 25.4 percent month on month in November as domestic confidence in the sector gained momentum. In year on year terms, property transactions climbed 41.9 percent in October.
The erosion of negative equity holders has been a key factor in the turnaround and sustained pickup of local demand, which has surprised on the upside.
"We think this will continue to play a key role in helping the local economy outperform the rest of the region next year," said Dong Tao, economist at CSFB.
