HONGKONG'S economic growth this year will be the second lowest in the region, albeit with the highest inflation rate, according to HSBC Asset Management forecasts. The local economy is predicted to improve 5.8 per cent this year, compared with five per cent last year. Despite chief economist Ian MacFarlane's words that the figures implied further boom, they only place Hongkong at second lowest position in the regional growth table, above the Philippines. However, its consumer price index is expected to rise 10.2 per cent - the highest in the region. Mr MacFarlane attributed this to the tight labour and property markets in the territory. He said he regarded an inflation rate of five per cent as bad enough. For next year, he forecast economic growth of five per cent and an inflation rate of 10.5 per cent. The slower growth would accompany a similar slowdown in China, where economic growth was predicted at seven per cent. He expected that deceleration because the Beijing government was likely to tighten credit to curb inflation in six months. Inflation on the mainland had become such a pressing problem that it needed prompt action from the government, he said. Tightened credit would harm state-owned and collective enterprises with little effect on joint ventures, which could resort to foreign financial resources and enjoyed export gains. Before the government moved, he predicted that inflation would hit 11 per cent in the second quarter, rising to 12 per cent in the third quarter. But the fourth quarter would see it falling as credit control started to take effect, he said. He predicted that inflation on the mainland for this year would average 10 per cent, on the back of 11.5 per cent economic growth. Mr MacFarlane said Japan was now in the last phase of a downturn and would see an upturn next year. Recovery of the Japanese economy would be induced by the 13.2 trillion yen (about HK$921.75 billion) fiscal package and money growth. Southeast Asian countries would benefit from Japanese recovery, with growth accelerating across the board except in China and Hongkong. A recovery in Japan could boost China's exports, but its effect on the mainland's economy would be overshadowed by credit control moves within the country. Mr MacFarlane expected interest rates in the region to rise moderately next year, with the Hongkong interest rate stable as a result of stable interest rates in the US. Thailand and Malaysia would increase reliance on loan capital as current account deficits widened. Hongkong manufacturers would benefit from a forecast slow recovery in Europe and continued recovery in the US next year. China's Most Favoured Nation trade status would be renewed, he predicted. But he cautioned that there could be an increase in international trade tension. However, the trend of the dollar to rise against European currencies meant Hongkong's exports to Europe would be less competitively priced, he said.