TNAG-1267-FCO40-1616-Economic-situation-in-Hong-Kong-1983 — Page 397

CODE 18.77

NR

Reference......

LKK 09014 Poli RECEIVED IN KEP SPY NO. 51

- 6 JUN 1983

Mr Mustard (Pensions Dept, ODAD

DESK O

PC

FUTURE INCREASES IN THE HONG KONGOCONSUMER PRICE INDEX

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1. Your minute of 17 May requested some estimate of Hong Kong's CPI(A) for the fiscal years to 1 April 1984, 1985 and 1986.

2. The cited Hong Kong telegram suggested an increase in the CPI(A) of 9% in the year up to 1 April 1983, pensions for FY 1983/4 being increased by this amount.

3. This increase of 9% is in fact the same as the forecast published at the time of this year's budget for calendar 1983. Figure 1 (attached) shows the change in the CPI(A) for the period 1977-82, with OECD consumer price inflation, and a forecast for inflation in the major seven industrial countries to 1986. in the Territory increased much more rapidly than in the industrialised world as a whole, and remains higher.

4.

Inflation

During the period of the first oil price shock, Hong Kong demonstrated remarkable flexibility. The CPI(A) had reached 18% in 1973, largely as a result of increases in non-oil import prices. During 1974, when the oil price rise contributed to average increases in import prices of over 30%, inflation fell to 14%; and in 1975 - when import prices in HK$ terms actually fell - the rate of increase of the CPI(A) fell to around 3%.

5. That the Territory has in the past exhibited such a dramatic fall in inflation suggests that predictions as to the future rate are likely to be wrong, though it is improbable that the experience of 1975 can be repeated. The weakness of the HK$ has meant that import prices have risen in domestic currency terms in 1981 and 1982, despite price falls in terms of other currencies for many raw materials. The CPI(A) rose by 8% in the year to January 1983 but is now probably increasing at 10% year-on-year.

6. Thus the HKG forecast for 1983 may be on the low side. If the HK$ recovers somewhat during the latter part of 1983 and early 1984, the inflation rate could be around 9% again for FY 1983/4.

7.

The prospect seems to be for an increase in commodity prices as the level of world activity picks up in the medium-term tending to increase average import prices. Unless the HK$ strengthens over this period, the Territory's consumer price inflation could increase further as both costs of finished imports and inputs to domestically produced goods rise.

8. The probability is then that with a continuation of current policies in the UK, the CPI (A) will exceed the UK's RPI over the period concerned. The HK$ is likely to weaken against the £, a tendency which political factors may reinforce.

9. This qualitative view is itself highly tentative, and I do not think that it is worth offering point estimates for the CPI for the last two years of the period concerned the uncertainties are too great.

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