Outlook is mostly fine with a few showers
Hong Kong's economy has maintained its impressive momentum in the last couple of years. While the global economic outlook has become increasingly uncertain, the International Monetary Fund projects in its recent 'Regional Economic Outlook' that Asia is likely to grow by 6.25 per cent this year and 6.75 per cent in 2012.
However, a possible escalation of financial turmoil in Europe and an impasse over fiscal sustainability in the US have increased the risks to growth. But inflation should recede gradually in the region, though near-term risks remain generally on the upside. The key challenges for Asian policymakers, therefore, are to support growth in this fragile global setting without jeopardising price stability and increasing balance sheet vulnerability.
For Hong Kong, we expect growth this year to be as high as 6per cent, with domestic demand clearly taking the lead. Private consumption appears set to be even more robust than last year, spurred by the economy's ability to create new jobs and new wealth. Our view is that the SAR's growth should moderate to between 4-4.5per cent next year, dragged down by anaemic demand from advanced trading partners, but supported by loose global financial conditions and favourable prospects in the mainland.
Hong Kong faces unrelenting inflationary pressure. Housing market exuberance has calmed down somewhat but the property market is still digesting the frenetic pace of the past two years while the rally in office property prices continues unabated. Despite government efforts to expand land supply, the pipeline of new housing will stay tight for some time. We expect prices and rents to remain very high in the next 12-18 months, and to continue affecting consumer prices.
In the uncertain times ahead, Hong Kong may well continue to attract foreign capital seeking a safe haven. This is a testament to Hong Kong's successful economic model. The city should continue to improve financial supervision and regulation to ensure these flows are intermediated safely. The government should also keep a close eye on exposure within the financial system to potential hotspots in the global economy.
Certainly, the linked exchange rate system is, and will continue to be, an important foundation for Hong Kong's economic system. In the event of a sharp downturn in the global economy, Hong Kong should be prepared to respond forcefully with both fiscal stimulus and preventative measures in the financial sector - as it did effectively in 2008.
As it has been for decades, I am confident that Hong Kong is well-prepared to handle whatever downsides the international environment throws at it.
Anoop Singh is IMF director for Asia and the Pacific
