ENG-2003 — Page 85

THE ECONOMY

Domestic Demand

Local consumer spending faced a severe blow in the second quarter of 2003 upon the spread of SARS. Then, with the epidemic brought under control, local consumer spending recuperated progressively in the third quarter, followed by an even more visible pick-up in the fourth quarter. Added to this was a strong resurgence in inbound tourism. For 2003 as a whole, although the volume of retail sales still decreased marginally by 0.6 per cent, this compared favourably with the 2.6 per cent dip in 2002. Private consumption expenditure (PCE) likewise staged a notable turnaround after the waning of SARS. On a year-on-year comparison, PCE went down by 1.8 per cent and 3.5 per cent respectively in real terms in the first two quarters of 2003, but increased again by 1.6 per cent in the third quarter, for the first time since end-2001. As consumer sentiment improved further in tandem with the upturn in the economy, a rally in the local stock market and a rebound in the property market, PCE growth accentuated to 3.6 per cent in the fourth quarter. For 2003 as a whole, PCE showed virtually no change in real terms, having contracted by 1.2 per cent in 2002. The pick-up in consumer spending in late 2003 occurred across almost all the major consumer goods and services. On a seasonally adjusted quarter-to- quarter comparison, PCE fell by 0.1 per cent and 1.4 per cent respectively in real terms in the first two quarters of 2003, and then bounced up by 3.9 per cent and 1.2 per cent respectively in the third and fourth quarters.

Amidst the fiscal restraint, government consumption expenditure (GCE) reckoned on a national accounts basis registered only modest growth in the first three quarters of 2003, by 1.3 per cent, 0.4 per cent and 0.5 per cent respectively in real terms over a year earlier. While the growth rate re-accelerated to 5.6 per cent in the fourth quarter, this was due in part to a low base of comparison a year earlier. Also contributing were the one-off compensatory payments made to those civil servants retiring under the Second Voluntary Retirement Scheme. For 2003 as a whole, GCE edged up by 1.9 per cent in real terms, still slower than the 2.4 per cent growth in 2002. On a seasonally adjusted quarter-to-quarter comparison, GCE increased throughout the four quarters of 2003, by 1.0 per cent, 0.1 per cent, 1.3 per cent and 3.0 per cent respectively in real

terms.

Overall investment spending, as represented by gross domestic fixed capital formation (GDFCF), regained some strength in the latter part of 2003, after the setback amidst the SARS impact in the earlier months. GDFCF still grew by 3.5 per cent in real terms in the first quarter of 2003 over a year earlier, but relapsed to a sharp decline by 5.7 per cent in the second quarter as business conditions worsened upon the spread of SARS. Then, with the ensuing recovery in economic activity, the decline in GDFCF narrowed to a mere 0.6 per cent in the third quarter, and rebounded to a 2.5 per cent rise in the fourth quarter. For 2003 as a whole, GDFCF fell only marginally by 0.1 per cent in real terms, much improved from the 4.3 per cent dip in 2002.

There was a clear resurgence of interest in acquisition of machinery and equipment during most of the year, other than the brief relapse in the second quarter. On a year- on-year comparison, expenditure on machinery, equipment and computer software soared by 11.9 per cent in real terms in the first quarter of 2003. After a temporary decrease by 2.0 per cent in the second quarter, the expenditure surged ahead by 4.9 per cent in the third quarter and even more by 10.2 per cent in the fourth quarter as the business outlook brightened. The intake of several aircraft in the second half of the year also helped. For 2003 as a whole, expenditure on machinery, equipment and

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