HK joins world slump - Hong Kong's gross domestic product growth expected to slow - Brief Article - Statistical Data Included

Business Asia, April, 2001

HONG KONG'S ECONOMIC growth will slow by more than half this year, pulled down by slumping demand from the US and the rest of Asia, the Government said.

Gross domestic product will probably expand four per cent in 2001 after growing 10.5 per cent in 2000, Financial Secretary Donald Tsang said, presenting the Budget for the year starting April 1.

Seeking to soften the impact, the government shied away from raising taxes and forecast a second straight deficit.

Slowing global demand for Chinese-made goods from computer parts to shoes is hurting Hong Kong's economy, because about half the city's exports are goods from the mainland passing through on their way to other destinations. Hong Kong is counting on a pickup in spending at home to keep the economy from stalling.

"We're facing a slowdown in the rest of the world, so a slowing in growth is to be expected," said Ian Perkin, chief economist at the Hong Kong General Chamber of Commerce. "Growth will be more domestically driven, and that will be good for government revenue."

The economy began slumping in the fourth quarter. GDP contracted 0.1 per cent from the previous quarter, seasonally adjusted, after growing a revised 2.1 per cent in the third quarter. The economy grew 6.8 per cent from a year earlier, compared with 10.5 per cent the previous quarter.

Slowing exports will keep a lid on growth this year. Tsang said shipments of goods will rise just 5.5 per cent, down from last year's 17.1 per cent.

While the domestic economy is gaining strength, it hasn't made a full recovery from the Asian financial crisis of 1997-1998. Property prices haven't rebounded after falling by about half during the crisis, consumer prices have fallen for more than two years, and retail sales are rising only slightly.

Still, Tsang pointed to bright spots for the economy this year. Investment will continue to grow after expanding 8.8 per cent last year, wages will rise "modestly," and strong demand from mainland China and Europe will keep exports from drying up, he said.

Falling interest rates may also give consumer spending a boost, economists said. The Hong Kong Monetary Authority has lowered rates one percentage point this year, moving in step with the US Federal Reserve, and more rate cuts are expected.

As expected, Tsang decided against raising corporate and personal income taxes -the lowest in Asia -- to plug the deficit. Hong Kong's corporate profit tax rate is 16 per cent, and the tax on salaries is 15 per cent.

"I agree with those who have said we should not rush to improve our finances at the expense of economic growth," Tsang said. Higher taxes "would hit middle-income earners hardest and could adversely affect local consumption and hence our economic growth".

Tax increases could also erode the city's competitive edge over rivals such as Singapore, which recently cut its personal income tax rate to 26 per cent from 28 per cent.

Bloomberg