Financial Secretary Paul Chan foresees a mild inflation increase of 1.8% for this financial year.
Delivering his 2017-18 Budget at the Legislative Council today, Mr Chan said low global inflation and the strong US dollar have lessened the impact of the rise in international oil prices, maintaining imported inflation at a low level.
"Inflationary pressure will remain mild in the short term. I forecast that the headline inflation rate for 2017 as a whole will be 1.8% with an underlying inflation rate at 2%."
GDP forecast
He warned that risk factors in the external environment will threaten export trade in Asia and Hong Kong, adding that sustaining domestic demand will remain crucial to maintaining the stable development of the city's economy and underpinning the employment market.
"Inbound tourism has improved recently, with fresh growth in the number of visitors. If this continues, the retail sector should be set to stabilise further. Favourable conditions in the job market and rising labour earnings have bolstered consumer confidence in the recent past.
"Sustained increases in infrastructure and other building and construction activities should provide momentum for domestic demand. Granting no severe external shocks, I forecast Gross Domestic Product growth of 2% to 3% in 2017."
He warned that the uncertain external environment and interest rate trend may trigger abrupt shifts in capital flows and heighten volatility in local asset prices, with repercussions on consumption and investment sentiments and on macro-economic stability.
"The global economy operated in low gear in 2016 and recorded the slowest growth since the global financial crisis. The situation was particularly grim at the beginning of the year, affecting the trade performance of Hong Kong and the Asian region.
"With the gradual recovery of tourism, the decline in the overall retail sales volume slowed notably to only 3.6% in the fourth quarter, but for the whole year it was still down by 7.1%."
Domestic demand strengthened in the latter half of last year. Favourable employment and earnings conditions, together with the support of relief measures introduced in the last Budget, were conducive to sanguine consumer sentiment.
The growth of private consumption expenditure gathered pace in the second half of last year, and investment expenditure also bounced back visibly.
"Overall, the local economy picked up progressively from a marginal growth rate of 1% in the first quarter to 3.1% in the fourth quarter.
"For 2016 as a whole, there was a modest growth of 1.9%, generally in line with the economic growth as forecast in last year’s Budget.
"Inflation pressure was moderate. The headline inflation rate for 2016 was 2.4%. Netting out the effects of the Government’s one-off measures, the underlying inflation rate was 2.3% in 2016, the fifth consecutive year of easing."
Economic outlook
Mr Chan said the economic growth of advanced economies will be "modest and patchy" this year.
"This, coupled with new uncertainties brought about by political changes in many parts of the world and rising populist and protectionist sentiments, will further complicate the situation and render the global economic outlook volatile."
He said although the US economy has continued to improve recently, the economic policy agenda of the new administration remains unclear.
"Despite the fact that the US may introduce fiscal stimulus measures conducive to global economic growth, there is increasing market concern over whether the US will roll out, in phases, a number of trade protection measures, which may disrupt the improving growth momentum in global trade.
"The Federal Reserve Board will proceed with or even expedite the normalisation of US interest rates. Consequently, monetary policy divergence among major central banks will become more pronounced. All these will impact on the global economy and financial environment."
He said constrained economic growth in Europe, Brexit and upcoming elections in some major European countries will complicate and add uncertainties to the European political and economic outlook.
Growth in Mainland China's economy is increasingly driven by domestic demand and the service sector, and is moving towards a pattern of sustainable development.
"With stable and appreciable economic growth as well as ample policy room, the Mainland economy should be able to maintain a medium-high pace of growth, remaining a mainstay supporting global economic growth."
