ENG-1998 — Page 75

CHAPTER 4 THE ECONOMY

THE Hong Kong economy experienced a severe setback in 1998, amid the volatilities in the local financial markets and the asset price slump caused by the regional financial turmoil. As a free and open economy with elaborate trade and investment links with the rest of East Asia, Hong Kong has not been immune from the contagion effect of the profound shocks emanating from the region. Local consumer spending went through a significant downturn in the year. Investment was also much reduced. Machinery and equipment purchases were held back by high interest cost and an uncertain business outlook. Overall building and construction activity, though still rather intensive in the first half of the year, slackened considerably in the second half as the effect of the property market slump filtered through to dampen private sector building activity.

The regional financial turmoil likewise took its toll on Hong Kong's external trade, as exports to East Asia, which together accounted for around half of the total exports, shrank markedly upon the fall-off in regional demand. Exports to the conventional markets such as the United States and the European Union, showed a distinct increase earlier in the year, then weakened towards the end of the year. On the other hand, inbound tourism, though remaining sluggish in the first half of the year, picked up visibly in the second half, aided by the government's facilitation measures, price-cutting and more intensive promotion.

Reflecting the setback in both external and domestic demand, the Gross Domestic Product (GDP) fell by 2.6 per cent in real terms in the first quarter of 1998 over a year earlier, 5.1 per cent in the second quarter, and further by 6.9 per cent in the third quarter. In the fourth quarter, a lesser decline of 5.7 per cent in GDP was recorded, in line with an improvement in local sentiment and financial conditions. For 1998 as a whole, GDP contracted by 5.1 per cent, in stark contrast to the robust growth of 5.3 per cent in 1997.

Yet the local economy has been adjusting promptly to the profound shocks from the region and beyond. Office and flat rentals have fallen sharply. Wages and salaries have eased. With the flexibility in the internal cost and price structure, the cost of doing business was able to come down in line with the decline in overall demand. Consumer price inflation receded quickly, and even turned negative towards the end of the year. For 1998 as a whole, consumer prices increased by an average of only 2.8 per cent, markedly down from the 5.8 per cent increase in 1997. Moreover, the adjustment process brought about a significant improvement in the external balance, with the combined visible and invisible trade account returning to a small surplus in 1998.

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