ENG-1995 — Page 73

THE ECONOMY

showed a further significant increase, offsetting substantially the deficit in visible trade.

On the domestic front, fixed asset investment was underpinned by a strong absorption of machinery and equipment. Retained imports of capital goods surged by about 23 per cent in real terms in 1995, up from 11 per cent in 1994. Construc- tion output was propelled by intensive work on the Airport Core Programme, but building activities by the private sector slowed down. Consumer spending stayed weak.

The labour market has eased since the beginning of the year. In the fourth quarter of 1995, the unemployment rate and the underemployment rate stood at 3.5 per cent and 2.3 per cent, respectively, compared with two per cent and 1.5 per cent in the same quarter last year. Nevertheless, in September there were still around 51 000 vacancies in the private sector. The existence of so many vacancies along with increased unemployment reflected a degree of job mismatch in the labour market.

The residential property market continued to consolidate. Trading activity moderated again, following a brief rebound after the Lunar New Year and in March and April. Buying interests were concentrated mainly in the primary market, where developers put in intensive promotion efforts with further price cuts and the offer of more flexible payment terms. Activity in the secondary market was subdued. Flat prices came under further downward pressures during the year. As more landlords put out their flats for lease in a sluggish sales market, rentals in new leases fell further. The sales market for office space remained quiet, and the rental market also softened. Anticipation of ample supply over the next couple of years could have prompted this adjustment.

Interest in old industrial buildings and industrial sites for redevelopment into modern multi-purpose industrial buildings was dampened by the slack conditions in the property market. The large increase in supply of industrial-cum-office premises also contributed. Leasing activity continued to be sluggish. Prices and rentals were trending down.

Consumer price inflation, measured in terms of the Consumer Price Index (A), rose to 8.7 per cent in 1995, faster than that of 8.1 per cent in 1994. The pick-up was mainly due to a greater amount of imported inflation in the early part of 1995, brought about by a weakened Hong Kong dollar along with the US dollar, an upsurge in world commodity and product prices, and high inflation in China. But as the currency effect gradually dissipated and as the US dollar rebounded in the latter part of the year, the significance of imported inflation declined somewhat. In addition, the uptrend in world commodity prices and inflation in China both moderated. Concurrently, locally-generated inflationary pressures also eased, helped by the relatively more abundant labour supply and the softening in property prices and rentals. As a result, by the fourth quarter of 1995, consumer price inflation eased back to 7.7 per cent, from 9.5 per cent in the first quarter.

Overall inflation in the economy, as measured by the GDP deflator, showed an even greater moderation over the course of 1995, but this was mainly due to a deterioration in the terms of trade consequential to the pick-up in import prices in the year. Excluding price movements in the external sector, the domestic demand deflator rose by 6.4 per cent in 1995, compared with 7.4 per cent in 1994.

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