IMF forecasts H.K. economy to grow by 4.5%-5% in 2004

Asian Economic News, Dec 29, 2003

HONG KONG, Dec. 23 Kyodo

The International Monetary Fund (IMF) on Tuesday projected a strong economic recovery for Hong Kong, with real gross domestic product (GDP) rising by about 4.5%-5% for 2004 following an estimated 3% expansion for 2003.

The IMF also forecast that deflation in the former British colony will ease to 1% by the end of 2004 and cease to exist by mid-2005.

Hong Kong's economic recovery will be supported by the boost in tourism from mainland China, the strengthening of the global economy, the advent of a free-trade pact between mainland China and Hong Kong, and the associated improvement in domestic consumer sentiment, the IMF said in a statement after a visit here in mid-December.

A pickup in economic activity, the stabilization of the property market and the end of deflation in mainland China will help moderate the city's deflationary pressures, the IMF said.

In September, the international body's forecast for Hong Kong's economic growth in 2003 was just 1.5%, lower than the projection of 2.2% made in May in view of the impact of the SARS outbreak.

The IMF's latest prediction of 3% growth for 2003 is in line with the Hong Kong government's forecast.

Despite its upbeat estimate, the IMF warned of the downside risks for the Hong Kong economy, including a sharp rise in interest rates and the possible spillovers from a disorderly adjustment of global current account imbalances.

It also noted that Hong Kong needs to adopt a credible plan for medium-term fiscal consolidation in order to help solidify the prevailing positive market sentiment.

The Hong Kong government was recommended to further cut the operating deficit by about 1% of GDP in the financial year of 2004-2005.

Reacting to the IMF suggestion, Hong Kong's acting Financial Secretary Frederick Ma said the government is committed to restoring fiscal balance by the financial year of 2008-2009.

Hong Kong faces a chronic deficit problem and is expected to have a record budget shortfall of HK$78 billion (US$10 billion) for the current financial year ending March.

The city's weak economy has made it difficult for the government to cut spending and generate more revenues by raising taxes and charges to improve the public coffers.

Yet, with Beijing's implementation of a series of economic stimuli, including the free-trade agreement, Hong Kong's economy emerged from its third recession in six years in the third quarter of this year.

Meanwhile, deflation in Hong Kong has eased although the consumer price index fell for the 61st straight month in November.