Soccer fans might call it a year of two halves. The first six months of 2003 could not have been much worse, starting off under a cloud of impending war in Iraq, nuclear confrontation on the Korean peninsula and a weak world economy. Hong Kong, meanwhile, found its legendary can-do spirit sapped by the third recession in three years, rising unemployment and controversy over proposed national security laws. Then came Sars, the mystery disease that originated in neighbouring Guangdong and spread to the rest of the world via our city. As bleak as the outlook was before Sars emerged, no one could have foreseen that the local economy would come to a near-standstill, or that our health-care system would be nearly crippled by a new virus bearing some relation to the common cold. Getting through the crisis meant drawing on reservoirs of goodwill and poise that many in the city never knew they had. Remarkably, however, when recovery did come, it was almost immediate. When the World Health Organisation declared Hong Kong a Sars-free port, domestic and international trade quickly resumed. The second half of 2003 was characterised by energy, optimism and economic resilience. We have seen a stock market revival led by China-related shares and initial public offerings, rising consumption and the beginning of the end of five years of deflation. Property prices, a good bellwether of the average resident's confidence in the future, have even seen a modest recovery, while demand for new projects is certainly as good as it has been in recent memory. On the political front, the people of Hong Kong surprised observers. A peaceful, half-million-strong march on July 1 and a record turnout in the November district council elections showed that the city's residents were concerned about much more than economics. Recovering As we begin 2004, the external environment is looking rather more rosy than it did last year. Global trade is recovering, and the mainland economy, with which Hong Kong is increasingly interconnected, is expected to continue growth of about 8 per cent. No wonder then that Hong Kong is among the most optimistic places in the world. Survey after survey reveals that about three-quarters of the population expects 2004 to be a good year, and the expectations may well be correct. Even the market's outlook on the Hong Kong dollar has reversed itself, with the unwinding of positions betting on a drop and the taking up of new ones betting on a rise. Fund inflows are set to continue rising as news of last year's stock-market performance and continued economic strength spreads. And considering that some $100 billion in new stock offerings are slated, there may be reason for retail investors to put some of their savings stockpiles into the market as well. There are caveats that have to be added to these expectations for a bright New Year. The risks for Hong Kong - an externally oriented economy - include slowdowns in the US and the mainland. Rises in global interest rates or the value of the US dollar - to which our currency is pegged - could increase capital costs and make Hong Kong's exports less competitive. The gathering mania over mainland-backed initial public offerings, likewise, could lose steam. UNCERTAINTIES Other uncertainties include the pace of electoral reform in Hong Kong, as well as the impact that a resurgence of Sars could have. Legislative Council elections scheduled for autumn are likely to be hotly contested. Also this year, the government is expected to begin the consultation process on whether and how to change the methods for selecting the chief executive and other representatives. But if the maturity and reasonableness of last year's political debates is anything to go by, these events will only reinforce the impression of stability in Hong Kong, not undermine it. The challenges for the city include maintaining our advantages in the face of strong regional and global competition. Inbound tourism is set to be buoyed by an expansion of the individual traveller permit system on the mainland and record monthly visitor numbers. Hong Kong can bet on remaining one of the preferred markets for fund-raising by mainland businesses. Yet these strengths cover up structural problems. What better time to address them than when Hong Kong is brimming with confidence? Long-debated reforms on stock-market regulation, including better oversight of listing sponsors, have to be carried through. The government needs to extricate itself from the property market, address a continuing budget deficit, find ways to spread the tax burden more evenly, and privatise assets now owned by government departments but which do not really belong on the public balance sheet. More broadly, there is need to adapt the population's skills to a services-based and information-based environment and to wave a permanent goodbye to the seemingly persistent nostalgia for manufacturing, once the core of the economy. Given the resilience Hong Kong showed in the second half of last year, there is every reason to believe these challenges can be met - and that 2004 will live up to the heightened expectations.