'Hong Kong, fundamentally, is very strong. We are now well on the road to recovery,' he said two weeks ago.

Still, there is no discernible feel-good factor.

People are wracked with worry about their jobs and the economy, according to the latest bi-monthly poll from the Home Affairs Bureau. Topping the list of job-related concerns, which were raised by 45 per cent of the 1,562 people aged 15 to 64, who participated in the July 10 to 14 phone survey, were finding jobs, being laid off or being under-employed. Even economy-related concerns, which were raised by 38 per cent of respondents, focused on employment.

This preoccupation seems odd, given that the unemployment rate has been dropping for a year.

Unemployment hit 6.2 per cent in the August to October quarter last year but dropped to 5 per cent in the latest April to June 2000 quarter.

Last week in Sydney, the Financial Secretary said he was hopeful unemployment would drop to 3 per cent within 18 to 24 months. It was the first time since the onset of the regional financial crisis that Mr Tsang ventured a specific time frame within which unemployment would subside.

Nevertheless, folks remain worried.

'For most people, if they hold on to their jobs, their salaries are flat,' Alan Siu Kai-fat, the director of the University of Hong Kong's Apec Study Centre, said recently. 'If they were unlucky and lost their jobs, they would find other jobs, probably, but they would be paid substantially less.'

Hang Seng Bank economists blame the malaise, unshakeable despite roaring real growth, on deflation.

For the first time since price statistics began being compiled in 1947, Hong Kong slipped into deflation in November 1998, when the year-on-year composite consumer price index measured minus 0.7 per cent. And deflation has hung on ever since.

Composite CPI, the broadest measure of deflation, sank as low as minus 6.1 per cent in August last year and has been stuck at about minus 4.5 per cent since April.

This has created a mismatch between the official economic growth figures and everyday experience.

Take another look at that stunning 14.3 per cent year-on-year GDP growth rate in the first quarter. That was 'real' growth, or growth adjusted for price changes. But the nominal growth rate, stated in current dollar terms and not adjusted for deflation, was just 6.2 per cent. Take into account the 2 per cent growth in population during the intervening year, and the nominal GDP growth rate slips to just 4.2 per cent on a per-capita basis. Hardly enough to rebuild feelings of well-being in a shell-shocked populace.

Meanwhile, nominal wages slipped by 0.4 per cent in the first quarter, though real wages were up by 3.7 per cent. This suggests that actual salaries remained largely stagnant, with 'increases' taking the form of improved purchasing power. Add to this the actual or apparent loss in wealth experienced by nearly one million owners of residential property - some of whom have seen the value of their property cut in half - and it is easy to understand why pessimism prevails.

'Growth in a deflationary period is different,' Hang Seng Bank senior economic research manager Vincent Kwan Wing-shing, and his colleagues wrote in the latest Economic Monthly. 'Many [people] are suffering from a wage cut or at least a salary freeze and are adjusting their spending habits. As an idiom suggests: 'Prices are cheap where people are poor'.'

To put things in perspective, the first quarter's 6.2 per cent nominal GDP growth rate is still well down - six percentage points down - from its level in the first quarter of 1997.

So the majority of Hong Kong residents remain worse off than they were before the regional financial crisis, despite the improving economy.

'Unless the deflationary trend can be reversed, people [will] find it hard to catch up with the 'real' growth as reported in the numbers,' Mr Kwan and his colleagues wrote in their report.

There is more than one way to catch up, however. If the economy slows in the second half of the year, as the bank is forecasting, then people might feel as though they are catching up simply because the economy has slowed enough to meet them halfway.

Hang Seng Bank is forecasting a full-year real GDP growth rate of 7.5 per cent. That is a more optimistic prognosis than that by our financial secretary, who told an Australian radio programme last week that full-year growth would probably come in at 'slightly better than 6 per cent'. However, given that the bank is forecasting first-half growth at 11.8 per cent, the full-year figure 7.5 per cent implies a second-half growth rate of just 3.2 per cent.

Clearly, the economists at Hang Seng see the economy slowing dramatically for the rest of the year; they blame the slowdown on higher interest rates and a higher base of comparison. Hong Kong's economy picked up steam in the second half of last year - growing at a real year-on-year rate of 6.8 per cent in the second half, after shrinking by 0.95 per cent in the first half - and that will make last year's numbers harder to beat for the rest of this year.

But the economists also blame the slower growth forecast on persistent deflation. With deflation now projected at minus 3 per cent for the year as a whole - just six months ago, they were projecting 1 per cent inflation for the year - they have had to revise their forecast for full-year nominal GDP growth downward to 3.4 per cent from 4 per cent.

Not surprising, then, that Jane and Joe Wong continue to feel blue about their jobs and the economy.

'Unless the deflationary trend can be reversed, people [will] find it hard to catch up with real growth'

Graphic: gdp08gbz