CONFIDENTIAL
Prospects for 1988
7. Retained capital imports are seen as a good indicator of investment demands. For certain subjects these imports are related to demand for domestic exports. This provides the basis for the forecasting part of the report. The projection for domestic exports determines demand for investment in machinery for manufacturing in 1988.
8.
There is plausibility to the elements of this story, but it is not clear that together they justify the very storng statement that demand for "this category of investment will slow down further in 1988". Even if exports slacken the labour market will remain tight and interest rates are not likely to rise very high. Thus the pressure
to invest in labour saving equipment will remain strong 1 export demand. In such conditions we should not expect a simple relationship between investment demand and export growth.
9. More importantly, it is not at all clear whether these general observations can justify the predictions for 1988 where investment in "plant and machinery" is expected to grow at 3.9% compared to 27.3% in 1987. Using capital imports as a guide for quarterly investment trends rough calculations suggest that such an annual growth rate will be achieved, even if the HK economy stagnates at the levels of the end of 1987. (This is a general proposition relating to the whole 1988 forecast, and it will be dealt with more fully when I report on the general economic performance in 1987).
Other
10. The section on the property market and construction sectors seems unexceptionable. Notable features are the absence of any large fall-out following the October crash, and the supply constraints (both workers and materials) affecting the construction activity.
25 March 1988
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M Wright
Economic Advisers WH 426D
270 2728
CONFIDENTIAL
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