Hong Kong's economic recovery is delayed but remains on track, with trade and tourism acting as the main drivers, according to a think-tank. Against a backdrop of deepening gloom and weakening exports, the Better Hong Kong Foundation predicts full-year growth of 1.4 per cent, with a rebound in activity in the third and fourth quarters. 'Two months ago, we expected the economy to turn around in the second quarter and it did . . . Exports are the major driving force,' said Richard Wong Yue-chim, director of the Asia-Pacific Economic Co-operation Study Centre, which undertook the study. 'But progress is slow. The world outlook is uncertain despite growth.' The centre's executive director, Alan Siu Kai-fat, said fixed investments were recovering slowly, having contracted sharply in the face of a construction slump in recent years. But consumption demand remained weak, he said. The unemployment rate would ease to 7.5 per cent by the end of the year, the study said. Mr Siu said the SAR's deflationary downturn was the result of normal cyclical factors, rather than competitive pressure from the mainland. 'Some cities can be persistently more expensive than others, even within the same country. The assertion that because they [mainland cities] are so cheap we have to become as cheap or even cheaper to maintain our competitiveness is without empirical support,' he said. 'The alleged loss in competitiveness is inconsistent with the performance of our external-trade sector. We've been running a surplus on our trade accounts - both visible and invisible - since the third quarter of 1998. We're expensive because we're productive.' Mr Siu said Hong Kong should further enhance its productivity to uphold its status. Driving down prices without improved productivity would only make Hong Kong 'another average Chinese city'. Mr Siu said deflation pressures would moderate next year with the removal of the one-off distortion of reduced government rates and service fees. A sustained weakening of the US dollar would also ease the pressure, he said.