3
Financial System and Economy
IN 1981, the economic conditions prevailing in the world's major industrialised countries, in particular those which represent Hong Kong's major export markets, were generally unfavourable. The United States, Hong Kong's largest export market, was teetering on the brink of a recession; the economy of the Federal Republic of Germany, was virtually stagnant; and that of the United Kingdom was in recession. Yet, against this very un- favourable background, the Hong Kong economy, which is highly export-dependent, achieved rapid economic growth. Preliminary estimates showed that the growth rate in real terms of the gross domestic product (G.D.P.) was 10 per cent in 1981, easily matching growth rates achieved in the earlier post-recession years. In the circumstances this was a remarkable performance.
While growth in the economy has continued to be rapid, it must be recognised, however, that unlike the previous two years the impetus to economic growth lay with domestic demand rather than with domestic exports. The growth rate in real terms of domestic demand was 11 per cent, significantly higher than that of domestic exports at seven per cent. Given that the export sector is still the backbone of the Hong Kong economy, the situation in which economic growth is led by domestic demand is one that inevitably causes uneasiness. The situation in 1981 was against a background of historically high interest and inflation rates, relatively low growth rates in domestic exports and a relatively weak Hong Kong dollar.
The fact remains, nevertheless, that the shift in the impetus to economic growth from domestic exports to domestic demand, particularly consumer demand which really started in the second half of 1980 was a natural manifestation of economic prosperity in previous years, led by the longest sustained export boom in the 1970s. The growth rates in real terms of domestic exports in the three years 1978 to 1980 were respectively 10.4 per cent, 16.5 per cent and 10.9 per cent. Also, the shift has not been so sharp as to have caused the growth rate of demand for output in the economy to get out of line with the growth rate of the ability of the economy to produce that output. Indeed, the growth rate of total final demand, after excluding the effect of the rapid expansion of the entrepôt trade, was 8.5 per cent in 1981, slower than the growth rate of the gross domestic product. This represents an improvement, in fact, over the situation in 1980 when the former, at 11 per cent, was higher than the latter, at 10 per cent. In consequence, therefore, there was a closer balance between the demand for and the supply of domestic resources in 1981, with domestic inflationary pressures showing signs of easing. The rate of increase in the gross domestic product deflator, which is the best available measure of overall domestic inflation, was 11 per cent in 1981, significantly slower than the rate of increase in 1980 of 13 per cent.
Although domestic demand played the dominant role in determining the growth rate of the economy, domestic exports held up extremely well during the year. The growth rate in