Today's release of the government's half yearly report is expected to show a further contraction in the economy. However, with the consensus indicating a fall of about 1.7 per cent year on year in gross domestic product for the second quarter, there are signs that the rate of decline may at last be easing. That will represent an improvement of sorts, being the smallest quarterly decline since the onset of recession last year, after a drop of 3.4 per cent in the first quarter. These days we cling to small mercies. So far an estimate of zero growth in the second quarter from one self-confessed Hong Kong bull is at the high end of forecasts. But, with just about all indicators continuing to paint a dismal picture throughout the first half, it is not yet time for Hong Kong to be declaring the tough times to be over. In May, unemployment rose to a record of 6.3 per cent - although it has since eased back to 6 per cent, while deflation deepened during the second quarter. External trade has also dwindled alarmingly, reflecting the mainland's shift in emphasis from exports as the authorities sought to kick-start the domestic economy, depriving Hong Kong of revenue from re-exports. To top it all off, real interest rates remain high and threaten to go higher if, as expected, the banks elect to follow the Federal Reserve Board's lead and raise the prime rate by 25 basis points. 'There is a reasonable chance that Hong Kong will be the only Asian economy with negative GDP growth for the year,' said Credit Suisse First Boston's senior regional economist Dong Tao. Morgan Stanley Dean Witter Greater China Economist Andy Xie Guoshong's prediction of a 2.3 per cent contraction in the second quarter is particularly gloomy. 'Nothing has changed in the bottoming process and it's not picking up very strongly,' he said. 'We still have a lot of deflation and it takes time to overcome.' However, at the end of August, second-quarter GDP numbers may now only be of historical interest. The question now is whether there were any signs of a turn in fortune during that time that gives hope for the rest of the year. The answer appears to be a tentative yes. Among the cautious mainstream views of recovery are those who believe the portrayal of Hong Kong as the region's economic deadweight is grossly overstated. Indocam Asset Management's associate director Terence Khoo predicted zero annualised growth in the second quarter. Mr Khoo dismisses the bears and says the statistics they use to point to Hong Kong's weaknesses fail to show the complete story. 'We are moving in the right direction, but a lot of people love to hate Hong Kong,' he said. 'Deflation is yesterday's news,' he added when challenged on the consumer price index, which earlier in the week, showed a 5.5 per cent year-on-year fall in July. 'Deflation isn't that bad unless it hampers consumption.' This brings us to the retail sector, which, along with tourism, has shown signs of improvement in recent months. A sigh of relief was almost audible this week when retail figures for June were released showing sales volumes were virtually unchanged - allowing for price changes - from a year earlier. This was after year-on-year declines of 3 per cent in April and 1 per cent in May. Dresdner Kleinwort Benson's chief economist Geoffrey Barker said the key to recovery was Hong Kong's trade performance in the second half. Again there is cause for optimism, with the mainland's export performance - on which Hong Kong depends heavily - also tipped to turn around, while recovery in the rest of Asia and a pick-up in Europe are expected to improve the situation. Goldman Sachs Greater China economist Fred Hu Zu-liu said the economy should pick up in the second half. But he added a caveat: if the banks raise interest rates today, that will hurt the economy, pushing real interest rates to 14 per cent. That could dry up what little appetite for spending there is here, and, without local consumption, Hong Kong will remain on the slow track to full recovery.