Hong Kong's economic growth slowed notably in the third quarter, with GDP rising 1.7% after a 4.2% rise in the second quarter, Government Economist Helen Chan says.

The economy in the rest of the year is likely to be subdued. Taking into account GDP growth of 4.3% in the first three quarters, economic growth for the whole year is forecast at 3% to 3.5%, revised down from the earlier 4% to 5%.

Mrs Chan today said the external sector in the third quarter slackened amid faltering global demand and domestic demand was severely hit by the global financial tsunami that caused significant jitters in local asset markets.

Feeling the crunch: Government Economist Helen Chan says Hong Kong's economic growth slowed notably in the third quarter, with GDP rising just 1.7%.

Slow growth

Total goods exports grew 1.4% in real terms, the worst performance since the first quarter of 2002. While the US market continued to pose the main drag, exports to other markets also saw different extents of slowdown as the impact of the global downturn increasingly set in.

Hong Kong's service exports still recorded growth of 5.3%, although likewise moderated from the second quarter. The slow-down was due to a temporary fall-off in inbound tourism during the Olympics and a further deceleration in exports of financial services amid the financial market distress globally.

Consumption spending still held firm in July and August, but slackened in September as the US financial turmoil escalated into a full-blown global financial tsunami. Private-consumption spending grew only 0.2% in real terms over a year earlier.

Cautious approach

Overall investment spending saw growth of 3% in real terms. Yet in the more recent period, companies have turned more cautious in making new investments and in hiring.

Along with the economic slowdown, the seasonally adjusted unemployment rate rose to a still relatively low level of 3.4%. Job prospects have inevitably dimmed as the near-term outlook is clouded by the unsettled global financial market situation.

Headline consumer price inflation fell to 4.6%, mainly reflecting the favourable effects of the Government's one-off relief measures.

Underlying inflation has tended to stabilise since July, as the tapering in food inflation offset the enlarged increase in private housing costs. CPI inflation notched down from 6.3% in both July and August to 6.1% in September, averaging 6.3% in the third quarter.

Increasing risk

Mrs Chan said the financial turbulence erupted into a full-blown global crisis causing significant clogs to financial markets around the world. The credit crunch that ensued has added woes to the already rapidly faltering global economy.

Although there are signs stability is gradually returning to the global financial markets, the credit markets remain unusually tight and will take time to return to normal functioning. The risk of a more prolonged and protracted global economic downturn has increased.

For many advanced economies, a recession is already underway. Amid such an uncertain and difficult external environment, Hong Kong's export performance is likely to remain rather lacklustre in the near term.

Domestic demand will likewise slow in the period ahead. The substantial fall-off in the stock market, coupled with less promising job prospects, will continue to restrain consumers' propensity to spend.

Inflation forecast

With global commodity prices retreating and the rebound in the US dollar since July, inflationary pressures from the external front are receding.

The expected slowdown in the Hong Kong economy will also entail lesser pressures from the domestic economy. But the earlier surges in private residential rentals might continue to feed through to consumer price inflation in the coming months.

With the favourable effects of the Government's relief measures continuing in the rest of the year, the forecast headline consumer price inflation for 2008 as a whole remains unchanged at 4.2%. Netting out the effects of Government measures, the forecast underlying inflation rate is also maintained at 5.5%.

Confidence urged

Mrs Chan said Hong Kong will inevitably experience an economic slowdown in the near future with financial, trade and logistics, restaurants, property and construction, tourism and consumption-related sectors being more seriously affected.

As the advance economies are heading towards a recession next year, the risk of having a recession in Hong Kong has also increased. However, it is difficult to make a conclusive assessment at the moment because the external environment is still changing.

Reminding Hong Kong people to get prepared for the downturn, she said the public should maintain their confidence because Hong Kong's medium and long-term economic outlook remains positive when all the down cycles in the international financial markets fully fade out.