Last year initial estimates show that GDP grew 2.9 per cent, following a 4.4 per cent year-on-year rise in the third quarter and a staggering 8.7 per cent in the fourth, fuelled by a strong external trade sector both in goods and services and improved consumer spending.

Although the third and fourth quarter rises were from a low base of comparison - the same period in 1998 was the height of the crippling economic downturn - the reversal of fortune was nevertheless resounding.

The medium-term growth trend has picked up by 0.5 per cent from last year, with Mr Tsang forecasting four per cent GDP annual growth over the four-year period 2000-2003, up from 3.5 per cent in last year's budget.

On the domestic front, there was a decidedly more optimistic tone, with both consumption and investor sentiment on the rise.

'The turnaround owed much to the remarkably flexible and adaptable attitudes of our workers and entrepreneurs,' Mr Tsang added.

While this positive sentiment would prevail, Mr Tsang added that the restraint on wage rises would keep a lid on spending, which, he said, was why he forecast modest growth in consumer spending of 2.5 per cent.

Overall exports rose four per cent last year, the return to positive growth largely achieved through a strong second half when import absorption from the United States and Europe continued, while East Asian demand also rose commensurate with the region's economic recovery.

Mr Tsang said he expected the trade outlook to remain promising this year, with economic activity in East Asia intensifying further, while the mainland was also expecting strong growth. He forecast annual growth of eight per cent in the export of goods this year, while exports of services would increase by the same amount.

Despite the expected strong recovery, the Government warned that the deflationary cycle of the past 12 months was far from over.

However, the rate of decline in consumer prices would ease this year, with composite CPI expected to fall one per cent this year compared to a four per cent drop in 1999.

The Government said in its economic prospects that with gradually rising import prices reflecting firming commodity prices and a strengthening yen, the situation might change later in the year.

Although the overall outlook was positive, Mr Tsang cautioned against unbridled optimism on the export front, pointing to interest rate concerns in the US, which could cause a possible slowdown in import demand there, as well as ongoing worries about the strength of the Japanese economy.

'Further interest-rate hikes [in the US] are likely if domestic inflationary pressure continues to consolidate from its current persistent buoyancy,' the Government warned.

Also a concern was the continued sluggish performance of domestic exports, which fell seven per cent compared to 1998.

On the other hand, investment spending, which was weak throughout last year, is forecast to improve in 2000.

With the overall positive business outlook, the Government said machinery and equipment purchases should rise, while building and construction activity, which rebounded at the end of 1999, would continue to rise, following the increased number of building consents late last year.

Public-sector investment would receive a boost through major infrastructure projects, including the KCR West Rail, KCR Ma On Shan line and the MTR Tseung Kwan O Extension.