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FINANCIAL
6. Interest rates rose slightly during the quarter but are relatively low (returns on six month deposits are 3%; best lending rate is 6%). Such rates have been required to hold the HK$ at the link rate as it strengthened against the US$. Speculative pressures resulting from the expectation that revaluation upwards was imminent led to capital inflows during January but have subsided, and rates rose during February and March.
7. Low interest rates and buoyant economic conditions have led to quite sharp increases in borrowing: total outstanding loans by banks and DTCS grew by 8.9% during the quarter.
UNEMPLOYMENT
8.
I
The 'headline' unemployment rate was 2.1% in the first quarter (it was 3.2% at this time last year). Effectively at full
employment, labour market conditions are described as 'tight' with
significant upward pressure on wages and salaries'. There has been little change in manufacturing employment, despite strong export performance, due to recruitment difficulties.
PRICES
9. The high level of demand has led to some pressure on prices (property prices and rentals showed significant increases) and the rise in import prices with HK$ depreciation during 1986 is feeding through to retail prices. These effects have been attenuated by falling prices for imported commodities and stable prices for imports from China (with the depreciation of the Renminbi). The year-on-year increase in the CPI(A) was 4.3%, up from 3.6% in the previous quarter.
COMMENT
10.
The position on exports, production and investment is impressive. Domestic inflationary pressures may start to erode competitiveness eventually, but the depreciation in line with the US$ has been sharp enough to have left exporters with a considerable advantage in non-US markets. If anything like this rate of export growth persists, the Financial Secretary will be revising upwards his 6% GDP growth forecast for 1987, which was based on a 7% growth forecast for domestic exports.
Nick Hallett
N O Hallett
Economic Advisers
WH 426B
270-2727
29 June 1987
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