Growth to slow amid rise in inflation, say analysts

PUBLISHED : Friday, 04 January, 2008, 12:00am
UPDATED : Friday, 04 January, 2008, 12:00am

Inflation in Hong Kong is expected to climb to about 4 per cent this year amid slowing economic growth and falling interest rates, the University of Hong Kong said.

According to the university's Apec Study Centre, double-digit increases in food costs and rent would continue to fuel the rise in consumer prices.

A weak US dollar also makes Hong Kong's imports relatively more expensive because of the city's currency peg. Government concessions have kept the reported inflation figure artificially depressed.

While worsening inflation will dampen economic prospects, real growth in gross domestic product is still estimated to reach a respectable 5.6 per cent this year, down from a projected 6.1 per cent last year, the university said.

'The main driver of the high growth rate for the previous year is due to a 4.1 per cent contribution from private consumption spending to the GDP growth rate,' said Richard Wong Yue-chim, director of the study centre.

'So the domestic demand is extremely robust. This will be our main harbinger for continued economic growth this coming year, despite the turmoil in the credit market which will bring down the pace of global economic growth, and create an uncertain, weaker external economic environment for Hong Kong.'

For the first three months of this year, real growth was expected to slow to 5.1 per cent from about 6 per cent in the previous quarter, said Alan Siu Kai-fat, executive director of the centre. But like last year, private consumption spending would probably be the impetus of this growth, accounting for 3.8 percentage points of the 5.1 per cent first-quarter growth.

Private consumption spending growth surged to 9.7 per cent in the third quarter of last year compared with 5.7 per cent in the previous quarter.

The university expects spending to ease to 8.2 per cent in the last quarter of 2007 and to 6.5 per cent in the first three months of this year.

The past four years of the recovery from the outbreak of Sars, coupled with buoyant stock and property prices, the tightening labour market and a booming mainland economy had helped prop up consumption spending, Mr Siu said.

Falling interest rates also encouraged spending and investment and the US would likely slash interest rates by 25 basis points this month, he said.

Hong Kong's economic growth could temper to between 3 per cent and 4 per cent if a US recession occurs this year, he said.