ENG-2008 — Page 78

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Chapter 3

The Economy

The outbreak of the global financial crisis in September derailed the upturn of the Hong Kong economy that had started in 2003. Both external and domestic demand slowed during the latter part of the year. Unemployment surged towards the end of the year, after falling to a 10-year low in mid-2008. Inflationary pressures increased in the first half of 2008, but receded in the latter part of the year.

The Hong Kong economy showed a rapid moderation in growth over the course of 2008, having expanded strongly in the preceding four years. For 2008 as a whole, the Gross Domestic Product (GDP) grew by 2.5 per cent in real terms, a rapid deceleration from the strong 6.4 per cent growth in 2007. Indicative of the rapid slowdown of economic activity, the year-on-year rate of real GDP growth decelerated from a strong 7.3 per cent in the first quarter to 4.3 per cent in the second quarter and further to 1.7 per cent in the third quarter. As the global downturn deepened further, the Hong Kong economy registered a contraction of 2.5 per cent in the fourth quarter. On a seasonally adjusted quarter-to-quarter comparison, real GDP expanded strongly by 1.1 per cent in the first quarter, before declining by 0.9 per cent, 0.7 per cent and 2 per cent in the ensuing three quarters.

The external trading environment worsened over the course of 2008. The advanced economies, especially the US and the euro area, being the epicentre of the global financial crisis, were the first to enter recession. This quickly translated into weaker demand for exports from the emerging and developing economies. By the end of 2008, most advanced economies were already mired in recession, and the condition of Asian economies also deteriorated rapidly, evolving into a synchronised global economic downturn which took its toll on world trade. Hong Kong's exports to the advanced economies slackened during 2008, and those to the Asian markets, including the Mainland, also deteriorated in the latter part of the year. The return to strength of the US dollar since the middle of the year was not conducive to the price competitiveness of Hong Kong's exports either. Exports of services likewise slowed, albeit to a lesser extent, over the course of 2008. As the fund-raising activities and the trading volume in the local stock market shrank in 2008, particularly after the abrupt escalation of the financial turmoil towards the end of