CONFUSION reigns in the twilight zone of Hong Kong's bubble economy, with dismal economic indicators leading some analysts to say this is the recession Hong Kong has to have. The extent and duration of any economic slowdown is a matter of disagreement among economists. That is significant in itself. Divergent forecasts are a classic indicator of deep economic uncertainty, according to Miron Mushkat, Lehman Brothers chief regional economist. Falling property prices and rising interest rates have crushed consumer confidence. Last month's 5.2 per cent year-on-year decline in retail sales confirmed the trend of a shopping slump. Now the question is whether Hong Kong is caught in a deflationary spiral that will take it beyond the so-called 'growth recession' touted by most local commentators. Pessimists have plenty to feed their fears. House prices continue to fall on small sales volumes, unemployment is rising, the trade account is bleeding, real wages are stagnating and monetary growth remains weak. Hong Kong was experiencing a credit crunch that was about to send it into 'recession Asian-style', said Peter Everington, managing director of Regent Fund Management. Gross domestic product (GDP) growth would be three per cent this year and 1.5 per cent in 1996, with inflation touching a high of 12 to 13 per cent, Mr Everington said. Such opinions are gaining currency. While the Government maintains a 5.4 per cent forecast, many economists admit unease with forecasts of about five per cent. What all agree upon is that the new airport - accounting for an average 0.5 per cent GDP growth over its six-year construction period - is a major fiscal stimulus. It accounted for the trade account's dip into the red over the last two months, because of the import of capital equipment, said Andrew Freris, chief regional economist at Salomon Brothers. Mr Freris has downgraded his forecast of Hong Kong's GDP growth from 5.5 per cent to five per cent for the year and cautioned that further interest rate rises could be close. The trade account is a major worry for all economists, with the trend of consecutive surpluses over the last decade apparently reversed. Because of Hong Kong's pegged exchange rate to the US dollar, a trade deficit limits credit creation and limits domestic consumption. Capital flows are unlikely to return, since Hong Kong cannot offer investors an interest rate premium to US rates. Yet the Hong Kong dollar risk premium is rising, as shown by last week's exchange rate volatility and the recent intervention by the Monetary Authority to buy three and five-year exchange bills, which reduced upward pressure on longer-term rates. A return to sharp asset price increases looks unlikely. In turn, consumer confidence can only diminish. Domestic consumption makes up about 60 per cent of Hong Kong's economy, of which retail sales account for about 25 per cent of GDP. After the boom years of asset accumulation, Hong Kong was experiencing a new fashion, said Ajay Kapur, regional strategist at UBS Securities. Saving was back in, with high interest rates and uncertain property prices making bank deposits an attractive option, he said. The problem of using Hong Kong dollar monetary aggregates is that they give mixed signals as to activity in the real economy. The crucial issue was one of competitiveness. The territory had priced itself out of the international market for goods and services. Salvation lay in rescuing productivity, which could be achieved only by a big change in the efficiency of business or a dramatic reduction in costs, said another economist. That will require further falls in property prices and rents which, unlike wages, adjust rapidly to changed market conditions. For Angus Armstrong, chief economist at Morgan Grenfell Securities the 'million dollar question' is the extent by which household finances have been reduced by the property malaise. Bankers believe Hong Kong is safe from a debt-induced, British-style recession because of the 70 per cent mortgage ceiling. Mr Everington is not convinced. Since corporate Hong Kong had relatively light gearing despite the huge expansion of bank credit over the easy money years of 1990-93, households balance sheets were probably worse than the restrictive lending policy indicated, he said. Hong Kong differs from other developed economies because of the unequal distribution of income - anyone earning more than $10,000 per month is in the top 30 per cent of wage earners. Should that third of the population - predominantly property owners - dramatically scale back on spending, the effect on domestic consumption could be beyond present forecasts, said Dr Mushkat. A further exodus of professionals from Hong Kong would further reduce consumer demand. It seems there is more than one 'million dollar' question hanging over Hong Kong's economic future.