ENG-2004 — Page 68

42 The Economy

economic outlook, improving labour market conditions, as well as the wealth effect stemming from the rebound in property prices. Investment demand strengthened as investor confidence returned. The activity upturn and brighter business outlook prompted a broad-based increase in machinery and equipment investment by growing businesses. building and construction output remained in a lull, however, due to the earlier fall-off in new private building projects, and less building in the public sector.

The labour market improved progressively on a broad front throughout 2004. As the economic recovery gathered pace, total employment expanded notably. Vacancies rose across many sectors, with particularly distinct rises in trade-related and tourism- related sectors such as freight transport services, retailing, and restaurants and hotels. Reflecting improved employment conditions, the seasonally adjusted unemployment rate fell successively from a high of 8.6 per cent in the second quarter of 2003 to a near three-year low of 6.5 per cent in the fourth quarter of 2004. The underemployment rate also fell from a high of 4.3 per cent in the second quarter of 2003 to 3.1 per cent in the fourth quarter of 2004. Downward pressures on wages and labour earnings, which were still pronounced in 2003, began to recede gradually in 2004. The fall in labour earnings narrowed from 1.0 per cent in nominal terms in the fourth quarter of 2003 to 0.6 per cent in the fourth quarter of 2004.

The property market as a whole rebounded further during 2004, following a sharp turnaround in the latter part of 2003. Overall market sentiment was underpinned by the sustained improvement in local economic fundamentals, the end of the deflation era, and the prevailing low interest rate environment. More specifically for residential property, market confidence was also boosted by favourable land auction results, removal of the security of tenure provisions for domestic tenancies, and expansion of the Mortgage Insurance Programme. Flat prices staged a remarkable upturn over the course of the year. Flat rentals also rose, albeit to a lesser extent. Prices for office space picked up sharply as a sanguine business outlook stimulated acquisition interest, while rentals for office space rose steadily along with the general upturn in economic activities. As to shopping space, both prices and rentals moved up appreciably, supported by vigorous retail business amid continued revival in local consumer spending and vibrant inbound tourism. Prices and rentals of industrial property likewise resumed increases as end-user demand strengthened amid buoyant export growth and improved investor

investor sentiment after the implementation of CEPA.

The economy finally came out of deflation that has lasted 68 months. As the pricing power of retailers returned along with the economic recovery, the rise in import prices stemming from a weak dollar and firming world commodity prices was more readily passed through to the retail price level. Prices of a wide range of consumer goods and services thus resumed increases after the first quarter of 2004. But the pace of upturn in consumer prices was only gradual, being kept down by modest housing costs due to an earlier fall-off in flat rentals. On a year-on-year basis, the decline in the Composite Consumer Price Index tapered distinctly from 1.8 per cent in the first quarter to 0.9 per cent in the second quarter, and then reverted to a