Government may be forced to revise its outlook as impact of recession diminishes

The Government is expected to announce today annualised economic growth of more than 3 per cent for the third quarter, further underlining Hong Kong's recovery is well under way.

Economists said they expected gross domestic product in the period to grow between 3.1 per cent and 3.5 per cent.

This would improve on the second quarter which showed year-on-year growth of 0.5 per cent - later revised to 0.7 per cent - as the SAR economy started to emerge from its worst-ever recession.

The return to positive growth followed an unprecedented five consecutive quarters of economic contraction.

Economists now expect the Government to revise its full year forecast of 0.5 per cent growth.

Despite the good news in the second quarter, Financial Secretary Donald Tsang Yam-kuen refused to upgrade the Government's full-year estimate.

But with exports steadily improving and domestic consumer confidence also rising since July, Mr Tsang may be forced to follow the private sector's lead and offer a more optimistic number.

Senior economist at Dao Heng Bank Daniel Chan Po-ming said while investor sentiment towards Hong Kong was still gloomy, the outlook had slowly improved during the third quarter.

He said it would continue to do so in the last three months of the year.

Mr Chan, who estimated a GDP growth rate of 3.5 per cent for the third quarter said the low base of comparison with the same period last year also had an impact on the figure.

Last year, the economy shrank 6.9 per cent from 12 months earlier during the third quarter.

Guonan Ma, head of greater China research, for Merrill Lynch, forecast third quarter growth of 3.3 per cent, noting the decline in investment was moderating, and the easing of destocking by companies after inventories rapidly ran down during the first half.

Standard Chartered Bank economist Tracy Yu Ming-lai believed the economy grew by 3.1 per cent in the third quarter and pointed specifically at the pick-up in re-export trade.

Ms Yu said that inventories were also rising.

This was because companies imported more goods but with poor consumer sentiment, they had inadvertently built up stock levels.

She added that growth of 1.5 per cent was expected for the full year, following a further strengthening of the economy in the fourth quarter.

'But the 1999 figures are not that important for the Government,' Ms Yu said.

'It is next year's growth that matters as they will use [those figures] to work out budget requirements for the following year and how much they need to spend or whether to raise tax.' The Government has already resigned itself to at least another year of budget deficit of several billion dollars but this could be reversed by the next financial year if the Hong Kong economy starts showing sustained growth.

Although his forecast of 2.2 per cent growth was decidedly lower than others, Goldman Sachs head of greater China research, Fred Hu Zu-liu agreed the significant pick-up in activity meant the economy was looking far healthier than even a few months ago.

'I think we have seen improvements across all the components of GDP, including consumer sentiment, investment, and trade, while services have also done much better,' Mr Hu said.