Leading business group cites sustained recovery, but deficit is still a worry In another sign of growing confidence in the local economy, the Hong Kong General Chamber of Commerce yesterday raised its growth forecast to 3 per cent for this year, and 3.8 per cent for the next, citing the sustained recovery. 'It's quite clear we have turned the corner, that the sentiment is there,' said David O'Rear, the chamber's chief economist. The chamber is one of Hong Kong's biggest business groups, with about 4,000 members. Its chief executive, Eden Woon Yi-teng, said: 'People have regained confidence these days. Cepa [the Closer Economic Partnership Arrangement] has encouraged investment activities. The unemployment situation has improved. The individual traveller policy is another boost to consumption.' The chamber previously forecast that Hong Kong's gross domestic product would grow 2 per cent this year, and 3.5 per cent next year. But GDP, which measures the output of all goods and services in an economy, grew 4 per cent in the third quarter as domestic demand came back to life thanks to a revival in consumer spending and travel-related sectors, and an influx of mainland visitors. Mr O'Rear said it would not be hard for that pace of growth to be maintained in the final quarter. But while the economy looked like growing healthier in the next few years, the biggest concern was the ballooning budget deficit, the chamber chiefs said. 'It's not something that's going to be easy to solve, but it's going be the No1 challenge over the next couple of years,' Mr O'Rear said. He added that he expected the deficit would reach $82.6 billion in 2003-04. The government's fiscal reserves are slowly being depleted because of high spending on civil service salaries and infrastructure projects, while income has shrunk because of a narrow tax base and the lack of land income. Financial Secretary Henry Tang Ying-yen forecast in October that this year's deficit would hit $78 billion, after swelling to $61.7 billion last year. At the government's rate of spending now, fiscal reserves would be down to one year of its average annual budget by the end of the financial year next March, Mr O'Rear said. Chief Executive Tung Chee-hwa, speaking at the chamber's 10th Annual Hong Kong Business Summit yesterday, agreed that balancing the budget would be a priority next year, as would ending deflation and sustaining the economic recovery. Mr Tung also said the business community should take advantage of Cepa to tap surging demand for services on the mainland and help turn Hong Kong into an Asian service hub. Anthony Nightingale, the chamber's chairman, said it was studying whether a sales tax should be introduced in Hong Kong to raise more revenue. Deflation, which has plagued Hong Kong for five years, may come close to an end in the second half of next year, the chamber said. 'Deflation will ease off, we have run our course,' Mr O'Rear said. He forecast that the composite consumer price index, which measures the cost of a basket of goods and services and is the most widely used gauge of deflation, would decline 1 per cent next year, compared with 2.7 per cent this year.