HONG KONG'S troubled economy is likely to improve in the second half as the success of China's economic policy makes further tightening of the economy unlikely, a Bank of China's (BOC) economic report says. Despite its bullish views, the bank lowered its forecast for Hong Kong's economic gross domestic product (GDP) growth for the year from six per cent to 5.5. This GDP growth is in line with the Hong Kong Government's recent forecast. As China's economy is headed for a soft landing, with an increase in investment and retail sales and an easing of inflation, the territory's exports to the mainland are expected to increase in the second half. With imports exceeding exports, which will lead to the topping up of foreign reserves, China's appetite for imports will increase. This, along with the gradual economic recovery of developed nations, would be enough to sustain Hong Kong's export growth, the BOC report said. Although the pace of United States economic growth had shown signs of slackening because of repeated interest rate rises, its import demand would not shrink immediately, the report said. Hong Kong's export growth this year should outperform last year's growth. Consumer demand, which had disappointed bullish economists in the first half, will rebound slightly. Interest rates, which had peaked and might even drop, would stimulate sluggish consumer demand in the second half, the BOC said. Although the report was optimistic that a revival in the stock market and property industry would have a positive impact on consumer demand, the relatively high unemployment rate was still likely to affect people's confidence. Unemployment, which had been brought about by the changing structure of Hong Kong's economy, would continue to restrain demand, the report said. 'Growth in private consumptions will be lower than the forecast made earlier this year. It will be the major factor pulling back a much stronger economic growth,' it said. Another concern over the economy was the territory's widening trade deficit. It jumped from $32.5 billion to $56.9 billion in the first four months of this year. The increase was caused by the sharp rise in retained imports of raw materials and semi-manufactures, triggered by a revival in industrial activity. Weak internal demand would diminish imports, and together with a continuing surplus in invisible trade, would narrow the deficit, the report said. Even if Hong Kong ended up with a trade deficit, it would not be large, and would be a short-lived because of the construction of the new airport, according to the report. Inflation in the second half will be pulled in by softened internal demand and lower inflation in China. The report estimated that the inflation rate for the year would be 9.3 per cent, which is slightly higher than its original forecast of nine per cent at the beginning of the year. This rate is slightly higher than the Government's revised rate of nine per cent. Internal investment demand would remain strong, buoyed by the new airport construction and new public housing projects, the BOC said. It estimated the building and construction work in the public sector to grow 30 per cent, much higher than the Government's forecast of 20 per cent. In the private sector, the growth may be hampered by the consolidation of the property market and poor land auction results. Private sector growth has been lowered from eight per cent to five.