TNAG-1748-FCO40-2467-Visit-by-Sir-Geoffrey-Howe--Secretary-of-State-for-Foreign-a-1988 — Page 164

PJMAFN

CONFIDENTIAL

VISIT OF THE SECRETARY OF STATE TO HONG KONG: 29-31 MAY 1988

A. BACKGROUND BRIEF: THE HONG KONG ECONOMY

[Background Brief by Hong Kong Government]

1.

While the economy remains generally buoyant, there has been a

slow-down in the growth rate of domestic exports since the third

quarter of 1987. In the first quarter of this year, domestic

exports grew by about 11% in real terms over a year earlier,

compared with growth rates of 15% in the fourth quarter of last year

and of 23% for 1987 as a whole. As Hong Kong is an export-oriented

economy, a slackening in the growth rate of domestic exports is expected to result in a slow-down in the growth rate of the economy

generally.

2.

The labour market is still tight. The seasonally adjusted

unemployment rate in the first quarter of 1988 was at an historic

low of 1.6%, although this was partly distorted by a reduced labour

supply during the lunar new year period in February. Labour

shortages continue to be reported, particularly in building and

construction. Wages and salaries have risen rapidly over the past

year or so and the level of vacancies is still high, but there are

early signs that the pressure of demand for labour may have begun to

ease.

3. The present rate of inflation is fairly high compared with Hong Kong's major overseas markets and with the neighbouring economies which are Hong Kong's main export competitors. The consumer price index showed a year-on-year rate of increase of 6.8% in the first

quarter of this year, compared with corresponding rates of increase of 5.6% and 6.7% in the previous two quarters. It is likely that

the inflation rate will increase further in the short term, before

it falls again in line with the expected slow-down in the growth rate of the economy.

Following two consecutive years of double-digit growth, Hong

Kong's gross domestic product is forecast to increase by 5%

4.

CONFIDENTIAL