''We are facing the most acute economic problems for many years. The whole community is very concerned about our economic and employment prospects,'' he said.

The Chief Executive said the Government would continue to maintain the ''steadfast course'' begun on July 1 1997.

''We will be implementing people-oriented policies, embracing change and rising to meet the challenges with our community. My aim is to build a more civil, affluent, stable, democratic Hong Kong that is full of vitality.''

He said that since July 1997 the SAR had successfully implemented 'One Country, Two Systems'.

''At the establishment of the Hong Kong-SAR, I specifically mentioned that while we could be proud of our economic achievements, we had to be alert to latent problems as some of these would undermine our long-term competitiveness,'' he said.

''Just as we were about to tackle these problems, Hong Kong was severely affected by the Asian financial turmoil. This led to the bursting of our 'bubble economy' and to a sharp economic downturn.''

Mr Tung said the Government had acted decisively to deal with the Asian financial crisis.

''But we still need time to solve the structural problems inherent in our economy,'' Mr Tung added.

Mr Tung said Hong Kong's externally-oriented economy was greatly affected by global developments.

''The hardships we currently face stem from both cyclical and structural factors,'' the Chief Executive said.

He said that in the past year there has been a slowdown in the SAR's major export markets - a cyclical adjustment.

''The cyclical adjustment of an economy usually means that it bottoms out and rebounds after a short period,'' he explained.

''However, the serious terrorist attacks in the United States on September 11... depressed consumer sentiment in overseas markets and created greater uncertainty in the global economy,'' he added.

Mr Tung said the ''gloomy outlook'' for global economic growth adversely affected the SAR.

''Hong Kong faces an accelerated economic downturn, a rise in unemployment, an increase in the fiscal deficit and a delayed recovery,'' he said.

Mr Tung said the SAR had to prepare itself for a''drawn out'' economic downturn.

But he added that Hong Kong had adapted well to adversity in the past.

''Today's circumstances make it essential for us to yet again reinvent ourselves. This is a new challenge for all of us,'' he said.

Mr Tung said the transformation would be complicated.

''The world is rapidly transforming from an industrial economy to a knowledge-based economy ... now, knowledge is the new currency.

''Second, globalisation has brought about tremendous challenges and opportunities. Advances in information technology and better transport links have globalised world markets. Popular products and services are now marketed worldwide; geographical boundaries no longer limit the potential of a product,'' he said.

Mr Tung said the SAR's pre-1998 ''bubble economy'' had left it with long-term problems.

''The Asian financial crisis deflated the bubble, and this has changed the way people spent and invested their money. Because of the sheer speed of change, it is a tougher transformation this time,'' said the chief executive.

''Nevertheless, if we are to preserve our economic vitality, create greater prosperity, and maintain living standards, economic restructuring is the only way,'' Mr Tung said.

''Hong Kong's operating costs are very high, so we need to move to high value-added activities. We must all do our best to move up to higher value-added activities,'' he added.