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SCMP Reporter

Hong Kong's economy performed slightly worse in the second quarter than first estimates indicated, according to official figures released yesterday.

 Waning domestic demand and declining export volumes took their toll with the Government forecasting that gross domestic product contracted by 5.2 per cent.

 This was 0.2 percentage point more than the initial estimate offered two months ago when Financial Secretary Donald Tsang Yam-kuen released his half-yearly report.

 The forecast followed minus 2.7 per cent GDP growth in the first three months of the year.

 Private consumption fell 5 per cent in real terms in the second quarter, after a 2.5 per cent drop in the first quarter, a result of falling demand, rising unemployment and the ongoing slide in asset prices.

 Economists said the revised second quarter estimate was in line with market expectations and that they had not altered their views on GDP forecasts for the end of the year.

 HSBC Holdings chief economist Jan Lee said the latest figures reinforced the fact that Hong Kong was entering a deflationary environment.

 Mr Lee said the most significant figure was the GDP deflator - the broadest measure of economic performance - which rose only 1.6 per cent following a rise of 4.2 per cent in the first quarter.

 'It shows very clearly that Hong Kong is undergoing domestic price deflation, meaning that this is the way economic adjustment will take place,' said Mr Lee.

 Morgan Stanley Dean Witter greater China economist Andy Xie Guoshong said the second quarter estimate was 'slightly better' than he had expected.

 The continued fall reflected the domination of domestic consumption and tourism as factors in economic activity, Mr Xie said.

 He pointed out that the annualised decline in GDP from the first quarter was 2.5 per cent, compared with an annualised fall of 10.25 per cent in the first quarter from the final quarter of last year.

 The market was expecting economic performance to worsen in the third quarter, before a possible modest recovery by the end of the year.

 Government consumption expenditure in national account terms fell by 5.2 per cent in the second quarter, following growth of 2.1 per cent in the first quarter.

 The decline was also affected by the high base in the same quarter last year, a government statement said.

 Overall expenditure on building and construction increased by 2.2 per cent in real terms in the second quarter, while private sector construction expenditure rose 2.8 per cent.

 This was because property developers strived to accelerate existing projects for advance sales.

 The figures also showed that public sector expenditure on building and construction increased by 1.2 per cent in real terms, with ongoing public housing work and the rush to complete the new airport railway, which offset the decline in output from other projects.

 Visible trade exports fell 0.5 per cent in real terms in the second quarter, while imports fell 1.8 per cent, stemmed by the lowering of domestic demand.



Falling domestic demand and declining exports force downgrade of official