THE ECONOMY
Reduced demand in the local economy thus resulted in a substantial improvement in the visible trade balance, although an increase in the terms of trade also mattered. With imports falling to a larger extent than exports, the visible trade deficit narrowed to $81.4 billion, or 5.7 per cent of the value of imports in 1998, from $159.1 billion or 9.9 per cent of the value of imports in 1997. In fact, by the second half of 1998, the ratio of the visible trade deficit to the value of imports had already fallen to a five- year low of 2.0 per cent.
On trade in services, exports of services were weak for most of the year, falling by about 6.7 per cent in real terms in 1998. Although inbound tourism staged a visible pick-up in the second half of the year, exports of financial and other business services continued to be slack. Imports of services also fell, by about 0.7 per cent in real terms in 1998, amid the setback in overall business activity. Yet a sizeable invisible trade surplus of around $89 billion was still recorded in 1998, more than offsetting the deficit on the visible trade account. This followed a surplus of $116 billion in 1997. Taken together, there was a combined visible and invisible trade surplus (including an estimate of imports of gold for industrial use) of around $4 billion, representing 0.3 per cent of the total value of imports of goods and services in 1998. This was a significant turnaround from the combined deficit of $47 billion, representing 2.6 per cent of the total value of imports of goods and services in 1997.
Domestic Demand
The asset price dip, together with moderated income, increased lay-offs and reduced job security in the labour market, led to a severe setback in local consumer spending in 1998. The decline was particularly sharp in the third quarter, when the local financial markets came under great downward pressure and volatility. Reflecting these developments, and also affected by the trend in inbound tourism, retail sales fell by 15 per cent in real terms in the first quarter of 1998 over a year earlier, 16 per cent in the second quarter, 20 per cent in the third quarter, and around 16 per cent in the fourth quarter. For 1998 as a whole, retail sales plummeted by about 17 per cent in real terms. There were particularly steep declines in sales of commodities in department stores, clothing and footwear, and such high-value items as motor vehicles, and jewellery and watches. The declines in sales of basic necessities such as fooduffs and commodities in supermarkets were more moderate. With consumption of services holding up better than consumption of goods, overall private consumption expenditure fell by 7 per cent in real terms in 1998, following a robust growth of 7 per cent in 1997.
Overall investment spending in the local economy fell by 6 per cent in real terms in 1998, following a strong growth of 16 per cent in 1997. Analysed by main component, expenditure on machinery and equipment was 7 per cent lower in real terms in 1998, as such investment was held back by credit stringency, high interest cost and an uncertain business outlook. In 1997, there was a growth of 17 per cent. Expenditure on building and construction consolidated after a 6 per cent growth in 1997, falling by 4 per cent in real terms in 1998. This was caused almost entirely by the marked decline in public sector civil engineering output upon full completion of the Airport Core Programme. Private sector building output still had a small increase in 1998, although building activity likewise slackened later in the year, as existing projects were progressively completed and new projects were deferred upon the downturn in the property market.