ENG-2003 — Page 72

THE ECONOMY

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In the domestic sector, consumer spending likewise underwent a severe setback in the second quarter of 2003, but was progressively resurrected in the third and fourth quarters. Consumer sentiment appeared especially upbeat towards the end of the year, boosted by the rally in the local stock market, a more active property market, and progressive improvement in the unemployment situation. Investment spending on machinery and equipment also turned up to a notable growth in the latter part of 2003, on the back of improved economic conditions and brighter business outlook, especially after the signing of the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Mainland. Yet building and construction output was weak throughout.

The labour market weakened substantially during the first half of 2003 upon the abrupt fall-off in economic activity caused by SARS, with labour demand shrinking most visibly in the consumption and tourism-related sectors. Then, as the economy revived, employment and vacancies showed renewed increases in the latter part of the year. The seasonally adjusted unemployment rate, having surged from 7.2 per cent in the fourth quarter of 2002 to a high of 8.7 per cent in May-July 2003, fell back appreciably to 7.3 per cent in the fourth quarter. The underemployment rate likewise surged, from 3.1 per cent in the fourth quarter of 2002 to a high of 4.3 per cent in the second quarter of 2003, as many employees in the SARS-affected sectors were temporarily suspended from work at that time. This was nevertheless followed by a notable decline to 3.3 per cent in the fourth quarter, as these employees gradually resumed work and as the overall work intensity rose again along with the recovery in economic activity. Labour earnings eased further by 1.8 per cent in money terms in the third quarter of 2003 over a year earlier.

The property market had clearly turned around in late 2003, after the languishing performance earlier in the year. On residential property, trading activity, having plunged in the second quarter, rebounded appreciably in the latter part of the year amidst growing optimism for the economy. Flat prices staged a distinct upturn in the fourth quarter, while flat rentals seemed to have bottomed out towards the year-end. On commercial property, the market for office space likewise picked up towards the end of the year, as manifested by a notable surge in the prices of office space and a narrowed decline in office rentals. As to the market for shopping space, the improvement in performance was even more distinct, with prices lifted visibly and rentals ceased declining. Regarding industrial property, while demand remained generally weak, keener interest came from certain end-users in converting some of the existing industrial sites into hotel use.

On consumer prices, the downtrend in the Composite Consumer Price Index (CPI) continued in 2003, as local prices were held down by the generally slack domestic demand and profit margin squeeze especially during the course of the SARS outbreak, as well as by the lower wages and rentals. The rates concession and waiver of water and sewage charges, as part of the Government's special relief measures, also dragged down the CPI for some months later in the year. Yet as the downward effect of these relief measures was lessened, and as price discounts and other concessions on many of the consumer items were reduced along with steadily improving demand, the year-on-year decline in the Composite CPI tapered visibly to 2.3 per cent in the fourth quarter of 2003, having widened from 2.0 per cent in the first quarter to 2.5 per cent and 3.6 per cent respectively in the second and third quarters. Also partly contributing were firmer prices of retained imports amidst a weaker US dollar and rising world.