Prices could fall for five more years while wages could drop as much as 40 per cent if Hong Kong's currency remains pegged to the US dollar, according to Credit Suisse First Boston (CSFB).
In a bleak assessment of the economic outlook, chief economist Dong Tao said while gross domestic product growth should improve, unemployment would climb to 9 per cent next year.
'My conclusion is that if the currency peg stays, our deflation course will continue and the adjustment in prices could take four to five years,' Mr Tao said yesterday.
'And we might see wages fall by a further 20 to 40 per cent.'
Salaries in Hong Kong were not particularly high compared with other leading cities but the SAR's proximity to the mainland put pressure on labour costs, he said. The economy was shifting from asset deflation to labour deflation, which would be an even more painful process.
Despite persistent deflation, rents and salaries were difficult to adjust. Firms were losing pricing power but rents remained high as they were bound by contracts.
Together with the inertia in wage adjustments and the mismatch in the labour market, there would be more lay-offs ahead.