THE ECONOMY
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The Economy in 1989
The growth rate of the economy continued to decelerate in 1989. While re-exports rose less rapidly, domestic exports showed a decline in real terms in the second half of 1989, over a year earlier. In the domestic sector, consumption and investment demand slackened in line with the consolidation in economic activity.
Events in China in June have also affected economic growth. The stock and property markets and tourist-related sectors were particularly hard-hit immediately after the events early in June. Since then, some recovery has been evident, although the pace of im- provement varied. The manufacturing' and trading sectors had not been disrupted to any significant degree. On the whole, the economy weathered the short-term impact well.
Despite the slow-down in activity, the economy was still facing capacity constraints. The labour market remained generally tight throughout 1989 and the rate of inflation was relatively high. The vacancies situation in most sectors improved in the latter part of the year, while consumer price inflation showed a tendency to ease.
Preliminary estimates show that the growth rate in real terms of the GDP was only 2.5 per cent in 1989, following increases of 14 per cent in 1987 and seven per cent in 1988. Over the past five years, the GDP rose at an average annual rate of seven per cent in real terms, a highly satisfactory performance by world standards.
External Trade
In 1989, the value of domestic exports grew by three per cent over 1988. After allowing for an estimated three per cent increase in prices, domestic exports showed virtually zero growth in real terms. This represents a marked slow-down when compared with an increase of 11 per cent in value terms, or nine per cent in real terms, recorded in 1988. On a year-on-year comparison, domestic exports rose by six per cent and two per cent respec- tively, in real terms, in the first and second quarters, but fell by one per cent and four per cent respectively, in real terms, in the third and fourth quarters. This slow-down was largely attributable to a slackening in demand for Hong Kong's products in overseas markets. It was also affected by reduced price competitiveness due to the appreciation of the Hong Kong dollar, in line with the US dollar, against the currencies of many major markets during 1989.
Domestic exports to the various major markets showed a mixed performance in 1989. On a year-on-year comparison, domestic exports to Japan grew significantly, by about 16 per cent in real terms. The growth rate in real terms of domestic exports to China, as Hong Kong's second largest market, decelerated sharply from 27 per cent in the first half of 1989 to about one per cent in the second half. This was attributable partly to the intensification of China's austerity programme since June and partly to a setback in outward processing activities across the border. Domestic exports to the United States, the Federal Republic of Germany and the United Kingdom declined by about four per cent, four per cent and nine per cent respectively in real terms. Although the United States remained the largest market for Hong Kong's domestic exports, its share fell to 32 per cent in 1989, from 37 per cent in 1987 and 33 per cent in 1988. This reflects, in part, the continuous efforts of local manufacturers and exporters to diversify their markets.
In terms of major product categories, domestic exports of clothing and textiles grew in real terms by about four per cent and seven per cent respectively in 1989. Their shares in the total value of domestic exports in 1989 were 32 per cent and seven per cent respectively. Domestic exports of electronic components also increased, by about 22 per cent in real terms. While domestic exports of watches and clocks showed zero growth, significant
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