ENG-2002 — Page 97

THE ECONOMY

The GDP deflator, as a broad measure of overall price change in the economy, decreased by 4.1 per cent in the fourth quarter of 2002 over a year earlier. This exceeded the declines of 2.3 per cent, 2.2 per cent and 3.1 per cent in the first three quarters. For 2002 as a whole, the GDP deflator was down by 3.0 per cent, larger than the 1.9 per cent fall in 2001. This was mainly attributable to accelerated drops in the price deflators for private consumption expenditure and for gross domestic fixed. capital formation, as well as a renewed decrease in the government consumption. expenditure deflator, more than offsetting an improvement in the terms of trade in goods and services. Within the GDP deflator, the domestic demand deflator and the total final demand deflator both showed larger decreases in 2002 than in 2001, by 4.6 per cent and 3.5 per cent respectively as against 2.5 per cent and 2.7 per cent (Chart 20).

Chart 20

Main inflation indicators (year-on-year rate of change)

Per cent

8

6

+

2

0

Composite CPI

-2

-4

GDP deflator

-6

-8

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

1997

1998

1999

2000

2001

2002

Both the Composite CPI and the GDP deflator continued to decline in 2002, extending the downtrend since late 1998.

Economic Policy

Under the 'one country, two systems' principle, the HKSAR shall continue to adopt economic, social and political systems distinct from those in the Mainland following reunification in July 1997. The Basic Law, as the constitutional law of HKSAR, gives a firm protection to this principle. The HKSAR shall continue to uphold the rule of law, maintain an effective executive-led Government, sustain an efficient and clean Civil Service, foster free enterprise and free trade, render a sound financial system and a robust monetary regime, practise prudent public finance, and keep a simple and predictable tax system with a low tax rate. This serves to provide a favourable overall business environment and helps instil confidence for foreign investors coming to Hong Kong.

The Government firmly believes that the market can allocate and utilise resources more effectively and has a greater capacity to foster creativity, provide economic

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