Hong Kong's Economic Growth Is Slowest in Five Years

By Nipa Piboontanasawat

Aug. 15 (Bloomberg) -- Hong Kong's growth cooled more than economists expected to the slowest pace since the third quarter of 2003, when the economy began to recover after shrinking during the severe acute respiratory syndrome epidemic.

Gross domestic product rose 4.2 percent in the second quarter from a year earlier, after gaining a revised 7.3 percent in the previous three months, the government said today at a press conference. That compared with the 5.9 percent median estimate of 15 economists surveyed by Bloomberg News. None had forecast such a small increase.

A global slowdown and a more expensive yuan have curbed demand for Chinese-made exports shipped through Hong Kong, a trade hub for China. Rising prices and a stock-market decline have curtailed consumer spending and dimmer growth prospects have damped business sentiment.

``This is a broad-based slowdown -- the spillover of the global slowdown has directly impacted Hong Kong's economic growth through trade and indirectly through domestic sentiment and consumption,'' said Kelvin Lau, an economist at Standard Chartered Bank Plc in Hong Kong. ``This is the start of a down cycle and we will see things slowing down for at least a couple of quarters ahead.''

Growth in exports, investment and domestic consumption all slowed, today's report showed.

Singapore's Slowdown

From the first quarter, Hong Kong's economy contracted a seasonally adjusted 1.4 percent in the three months ended June 30, the government said.

Singapore's economy grew at the slowest pace in five years in the second quarter, a report this week showed. The expansion was 2.1 percent from a year earlier.

The global economic slowdown, financial market ``turbulence,'' high commodity prices and rising inflation across Asia are challenges for Hong Kong's economy, the government said in a statement. ``The macroeconomic adjustment measures in the mainland economy also need to be closely watched,'' it said.

``Everything has slowed in the second quarter,'' said Paul Tang, chief economist at Bank of East Asia Ltd. in Hong Kong. ``Looking ahead, sluggish exports and domestic consumption will continue to drag economic growth throughout this year.''

Hong Kong Exchanges & Clearing Ltd., operator of Asia's third-biggest stock market, posted on Aug. 13 its first drop in quarterly profit in three years, as the absence of one-off gains countered revenue from higher trading volume.

Growth Forecast

The government kept today its forecast for economic growth of between 4 percent and 5 percent this year. Last year's expansion was 6.4 percent. Inflation will probably accelerate to 4.2 percent this year from 2 percent in 2007, the government said, raising its estimate from 3.4 percent.

Hong Kong's exports of goods rose 4.4 percent in the second quarter from a year earlier, after gaining 8.3 percent in the previous three months, the government said.

Concern that a global slowdown will erode company profits has dragged the key Hang Seng Index of shares down 24 percent this year. In the housing market, the number of residential units changing hands fell 19.1 percent in July from a year earlier.

Inflation surged 6.1 percent in June, more than triple the 2 percent pace in all of 2007, as a fixed exchange rate boosted the cost of imports and food prices climbed in China, the city's major supplier. Rents, utility and transportation prices have also increased.

Consumer confidence fell in the second quarter to the lowest level in 3 1/2 years, according to a report published in June by MasterCard Inc., the U.S. credit-card company.

Business Investment

Household spending rose 3.1 percent in the second quarter from a year earlier, after gaining 7.9 percent in the previous three months, the government said. Business investment increased 4.3 percent after climbing 9.9 percent.

Still, unemployment at a decade low, reduced interest rates, tax cuts and government subsidies may give some support to domestic consumption.

Hong Kong Chief Executive Donald Tsang last month announced HK$11 billion ($1.4 billion) of inflation relief, including electricity subsidies and a food allowance for the poor. In February, Financial Secretary John Tsang cut salary and profit taxes, scrapped beer and wine duties and waived property rates.

The seasonally adjusted jobless rate was at 3.3 percent in the second quarter. Banks in the city have cut interest rates seven times between September and March, following similar moves by the U.S. Federal Reserve because of a fixed exchange rate.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net