Country Report Hong Kong March 2009

Outlook for 2009-10

• Hong Kong's chief executive, Donald Tsang, is becoming increasingly unpopular. Although he is safe in his position, the Chinese government is becoming concerned that unrest will grow as the recession deepens.
• Chinas decision in December 2007 not to permit full direct elections for the post of chief executive before 2017 or for the Legislative Council (Legco) before 2020 will limit the options for political reform available to Mr Tsang.
• As revenue streams weaken and government spending increases to support economic growth, the fiscal deficit will grow. The deficit will average 4.4% of GDP in 2009-10.
• The Economist Intelligence Unit expects real GDP to contract by 5.9% in 2009. The contraction will be broad-based and will affect all sectors of the economy, including exports, private consumption and fixed investment.
• Hong Kongs current-account surplus will remain substantial. Slowing export growth will be offset by weaker import expansion, and the services surplus will remain huge.
• Consumer price inflation is forecast to slow to 1.1% in 2009, down from 4.3% in 2008. Falling food prices and weak domestic demand will be the two main factors bringing down inflation in 2009.

Monthly review

• Hundreds of workers at a Hong Kong-based telecommunications firm, PCCW, held a half-day strike to protest against plans to cut pay, amid rumours that staff numbers were to be reduced.
• The government's latest budget, which was announced in late February, was a disappointment for those hoping to see a big increase in state spending to combat the deepening economic downturn.
• Hong Kong is now in the midst of a deep recession, after the economy contracted for the third consecutive quarter on a seasonally adjusted quarter-on-quarter basis in the final three months of 2008.
• According to the latest national-accounts data, private consumption, exports and fixed investment all fell in the final quarter of 2008. The government is now predicting a large contraction in GDP in 2009.
• Both property prices and the stockmarket fell further in February, against a background of growing concern for the health of Hong Kong's economy, which has been hit hard by the global economic downturn.