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SCMP Reporter

Growth to beat forecast as 68 months  of deflation are officially declared over

Hong Kong's economic growth is set to exceed the forecast 6 per cent this year as the city has finally climbed out of 68 months of deflation, Financial Secretary Henry Tang Ying-yen said yesterday.

The composite consumer price index, driven by an increase in utilities, clothing and footwear, jewellery and tour prices, rose 0.9 per cent in July compared with the same period a year ago.

It was the first year-on-year rise in the CPI since November 1998 and has stopped what economists believe to be the world's longest unbroken deflationary cycle in post-war economic history.

Japan suffered a decade of deflation in the 1990s but economic relief measures boosted prices intermittently over the period. In Hong Kong, the deflationary period saw commodity prices fall about 14 per cent. They now stand  at 1995 levels.

Economists predict the CPI will fluctuate in the coming months and the full-year inflation figure may still be negative or close to zero. Speaking after the Hong Kong Economic Summit yesterday, Mr Tang said the city's economic growth could be better than expected.

'The employment situation is improving and we believe economic growth will hit double digits in the second quarter,' he said. 'If this trend continues, it is possible that we can do better than the 6 per cent we forecast in the budget.'

The government will announce the second-quarter gross domestic product figure on Friday and is likely to revise its full-year forecast.

Major finance industry players have already predicted the annual GDP growth will reach at least 6.5 per cent,  against the backdrop of soaring global oil prices.

Mr Tang welcomed the end of deflation but stressed the return of inflation might not be good for all - especially if the return was 'too fast and too strong'.

'The working class, if they do not have a pay rise, will face certain pressure. But under inflation, in normal circumstances, wages and asset values will have room to adjust as the economy grows,' he said.

Mr Tang said a slight dose of inflation, ranging between 2 and 3 per cent, would be beneficial to economic growth.

Chief Executive Tung Chee-hwa also said the economic outlook was positive, and foreshadowed more announcements on the Closer Economic Partnership Arrangement between Hong Kong and the mainland.

'Property prices have stabilised, unemployment has levelled off and been declining, although very, very slowly, and deflation is disappearing,' Mr Tang said at the summit.

'Prospects for Hong Kong, at least in the short term, are encouraging, despite the beginning of a new cycle of interest rate increases, high oil prices and possible uncertainty geopolitically.'

Terence Chong Tai-leung, associate professor of economics at Chinese University, said GDP growth might reach 7 to 8 per cent this year. He said the surging oil price could drive inflation to 2 or 3 per cent in the coming year.

Yu Pang-chun, chairman of Hong Kong Retail Management Association, expected no rise in consumer spending despite the end of deflation. He said durable goods and clothes had shown signs of price increases but food continued to drop.

'The retail sector will only recover  through a genuine improvement in the business environment and a pay rise for workers,' he said.



Inflation signals rising economic fortunes for HK