40
FINANCIAL SYSTEM AND ECONOMY
real terms for 1981 as a whole, at seven per cent, was very respectable by current international experience and encouraging in view of the much larger base that had already been built up in recent years. A major reason why this was possible, despite a recession- ridden world, is that the cost/price structure of the economy had been adjusting favourably. However, with domestic demand providing the impetus to economic growth, the growth rate of imports in 1981 exceeded the growth rate of total exports. And as the terms of trade deteriorated in response to changing demand conditions, the visible trade ‘gap' that is the proportion of the value of imports which is not covered by the value of total exports widened, leading to a depreciation in the exchange value of the Hong Kong dollar. This depreciation has been helpful in maintaining Hong Kong's export competitiveness. In consequence, the very sharp slow down in the growth rate of domestic exports in 1980 (year-on-year from 18 per cent in the first half to seven per cent in the third quarter and four per cent in the fourth quarter) was reversed in 1981.
At the same time, however, the depreciation exerted upward pressure on prices. The rate of increase in import prices, particularly in respect of foodstuffs and fuels, was rapid. So the rate of inflation, as measured by the rate of increase in the various consumer price indexes, remained uncomfortably high. The New Consumer Price Index (A), for example which is representative of the price increases faced by the relatively less well-off 50 per cent of households in Hong Kong averaged 15 per cent higher in 1981 compared with 1980. While this is so, it must be remembered that household incomes increased rapidly too, albeit for those households with family members employed by the manufacturing sector, incomes were increasing at rates which were only marginally higher than the rate of inflation. For such households the improvement in their standard of living was small.
Labour Market
The reason why the standard of living of some households has not improved to the same extent as suggested by the rate of economic growth can be traced to developments in the labour market. The size of the labour force has been growing rapidly in recent years as a direct and indirect result of immigration. The direct effect of the influx of immigrants on the supply of labour is obvious. What is not so obvious is the indirect effect. By joining the labour force and thus slowing down the rate of increase in wages, particularly in the manufacturing sector where immigrants tended to be successful in finding work, immi- grants have induced some people (such as housewives) to join the labour force to maintain or to achieve improvements in the standard of living of their households. In 1981, during the 12-months ending September, the labour force grew at a rate of about 5.4 per cent per annum. Thus, economic growth in 1981 represents, to a significant extent, a larger economy with more workers rather than increasing productivity.
Nevertheless, there were signs during 1981 that the growth rate of the supply of labour may have started to slow down, a consequence presumably of the successful stemming of the inflow of illegal immigrants since October 1980. After increasing further to 4.1 per cent in March 1981 from the seasonally adjusted rate of 3.8 per cent in September 1980, the unemployment rate declined in September 1981 to a seasonally adjusted rate of 3.6 per cent. Considering that the unemployment rate had been increasing continuously since March 1979 when a historically low figure of 2.3 per cent was recorded this development was encouraging; although it is still too early to tell whether the September 1981 figure signified conclusively a reversal of the recent trend.
Meanwhile, the rate of increase in wage rates in the manufacturing sector remained rather low in real terms. During the 12 months ending September 1981, they increased by