The US credit crisis has escalated into a full blown global financial storm, leading to volatility in international financial markets, tensions in interbank lending, credit tightness, and a sharp fall in consumer and business confidence.

Hong Kong is feeling the full impact of the turmoil and it will require our collective strength and determination to ride out this storm. The crisis is inflicting huge shocks on the global economy with advanced economies heading towards recession, and the situation in emerging market economies is worsening fast. A synchronised global economic downturn is underway.

Being a highly externally oriented economy, and because of our close integration with international trade and capital markets, the Hong Kong economy is bound to be adversely affected by the global downturn.

The impact of the financial storm is increasingly showing up in different economic segments in Hong Kong, with both external and local demand slackening in recent months. The volume of merchandise exports was flat in September with retail sales up only 1.8% in real terms.

Financial services, trade and logistics, tourism and consumption-related services as well as the real estate and construction sectors are likely to be the hardest hit sectors.  Unemployment remains relatively low at 3.4% for the July to September period, but there are signs that it is beginning to climb.

The latest indications suggest that our third quarter economic growth will moderate further from the 4.2% growth in the second quarter, and there is little ground for optimism about economic conditions in the fourth quarter. It is likely that our earlier forecast for full year economic growth in 2008 of  4% to 5% will be difficult to attain.

However, there are signs that inflationary pressure is set to ease along with the economic slowdown, lower global food and fuel prices, and a stronger US dollar.  The expected easing of inflation will hopefully give consumers a little more spending power.

The current financial crisis is the worst since the 1930s. In these exceptional times, the Hong Kong Government will continue to take prompt action and implement timely and targeted measures to mitigate the external economic and financial shocks on our economy and people's livelihood.

The International Monetary Fund recently concluded its 2008 Article IV Consultation on the Hong Kong economy. The IMF Mission to Hong Kong notes that the downside risks to our economy have increased due to the slump in the global economy.

However, it points out that our banking system has stood up well to the impact of the financial turmoil. The IMF also supports the Government's fiscal stimulus of infrastructure investment as well as investment in human capital through free secondary school education and funding for research activities in our universities. 

The IMF considers that the 2008-09 Budget together with the supplementary package of measures introduced in July have accomplished their goals. These goals were to provide a timely modest boost to the economy and, at the same time, render targeted relief measures to protect vulnerable groups in society from the full effects of high food prices and the economic downturn. 

More targeted action will be required as the financial crisis plays out. The Chief Executive has already chaired the first meeting of the Task Force on Economic Challenges which will assess the impact of the financial storm, consider measures to mitigate its impact, and identify new opportunities which will undoubtedly emerge when the crisis subsides.

The IMF Mission forecasts Hong Kong's economic growth will fall to around 2% next year, mainly due to anticipated continued turbulence in the international financial markets. In the medium term it believes that an underlying growth rate of around 5% is feasible, although much will depend on the trajectory of economic and financial integration with the Mainland and how this is managed.

The Hong Kong Government remains fully committed to furthering economic integration with the Mainland so that we can make the most of the comparative advantages between the two. In the face of the financial storm, the Central Government has already put forward a series of measures to stimulate the nation's economy, including increasing export tax rebates and providing assistance to SMEs. This will have a positive effect on the local economy.

As China's global financial centre, we will continue to enhance communication and co-operation with the Mainland's regulatory authorities. We will also seek out new opportunities during this crisis to strengthen our position as the most important city in China for international finance. This is consistent with our economic development strategy of "leveraging on the Mainland while adopting an international outlook".

No single economy is immune to the shock waves from the synchronised global downturn. Hong Kong has faced many similar challenges in the past, most recently during the Asian financial crisis a decade ago. Each time we have bounced back stronger and more confident than before. Once again, we will be looking to the resilience of our market economy and the adaptability and resourcefulness of our people to rise to the occasion.

We have on our side a considerable fiscal reserve and the ability to consistently attain a large current account surplus, placing Hong Kong in a stronger position than many other economies to weather the current crisis. We must remain confident and believe in our proven resilience and adaptability in coping with crises. Everyone needs to play their part so that we can all look forward to an even brighter future for our city.

This article from Financial Secretary John Tsang appeared in several local newspapers.