ENG-2007 — Page 76

Domestic demand progressively assumed a more important role in driving the economy. Local consumption grew robustly in 2007, particularly in the second half of the year, on the back of rising income, a robust labour market and strong performance of the asset markets. In 2007, private consumption expenditure (PCE) recorded the fastest growth since 1993. Demand was particularly strong for consumer goods and services. The overall investment growth rate remained firm in 2007. Investment in machinery, equipment and software continued to grow, though not at the swift rate of the previous three years when such investments chalked up double-digit growth. Construction works started to show signs of stabilising in 2007, thanks largely to the rebound in private sector building at a time when government construction work remained lacklustre.

The labour market improved further amid sustained economic growth. Total employment increased by 2.5 per cent in 2007, up from the 2.1 per cent gain in 2006, and the total number of employed persons reached an all-time high of 3.53 million in the fourth quarter of 2007. Since the trough in 2003, a total of 366 300 additional jobs have been created. Meanwhile, the seasonally adjusted unemployment rate fell to 3.4 per cent in the fourth quarter of 2007, the lowest in almost 10 years.

Economic growth plus higher household incomes provided strong support for the residential property market in 2007. The favourable interest rate environment in the second half of the year also helped boost demand for residential properties. Both flat prices and rentals were markedly higher at the end of 2007 than a year ago, with the number of transactions in residential properties in 2007 showing a significant rise from the level in 2006. Nevertheless, flat prices at the end of 2007 were on average still well below that of 1997, their peak year.

The local stock market kept up the momentum generated in 2006 and advanced strongly during most of 2007 amid a large flow of capital into Hong Kong. The Hang Seng Index broke the 30 000 mark for the first time in October, but increasing concern about further turbulence in the world financial market led to corrections in stock markets everywhere. The Hang Seng Index closed the year at 27 813, still 39 per cent higher than at the end of 2006. The average daily turnover and stock market capitalisation swelled further to $88.1 billion and $20.7 trillion respectively in 2007. A total of 439 Mainland enterprises were listed on the Hong Kong stock exchange at the end of 2007, accounting for 58 per cent of total market capitalisation, attracting overseas investment in companies operating on the Mainland. Besides, Hong Kong also helped Mainland companies and individuals to handle their foreign investments. Bullish investor sentiment boosted fund-raising in Hong Kong during most of the

year.

Consumer price inflation climbed up during 2007 alongside the sustained brisk economic expansion. Apart from the external forces such as global food and energy inflation and the weakening of Hong Kong dollar given the drop in US dollar, the strengthened pricing power of retailers because of the buoyant consumption market was also a factor that put upward pressure on local prices in spite of the sustained productivity gains. The edging-up of housing cost was another development that