Released on February 1st, 2012

Economic Performance and Prospects

11. I shall now detail our economic performance since 2007 and give an account of our future prospects.

Economic Performance

12. The Hong Kong economy has in the past several years weathered an extraordinary period.At the start of the current term of Government in 2007, Hong Kong boasted a vibrant economy.Consumer sentiment and investor confidence were strong.Then came the unprecedented financial tsunami of 2008 triggered by the sub-prime mortgage problem in the US.Hong Kong was inevitably hit hard.Not only was there an across-the-board slowdown in external trade and domestic demand, GDP also fell for four consecutive quarters since the second quarter of 2008.This was coupled with a substantial drop in our exports of goods and a rise in unemployment rate.

13. As the Mainland economy picked up its growth and the European and the US economies began to stabilise, our economy started to improve in the second quarter of 2009 and then embarked on a full-fledged recovery in 2010.In the second quarter of 2010, the size of our real economy surpassed its pre-tsunami peak.This was followed by a couple of quarters of above-trend year-on-year growth.

14. The first quarter of 2011 still saw a year-on-year growth of 7.6 per cent.Since then, however, as the external environment deteriorated rapidly, our exports plunged, affecting the overall economy.Economic growth slowed from 5.3 per cent in the second quarter to 4.3 per cent in the third quarter and further to three per cent in the fourth.For 2011 as a whole, GDP grew by five per cent in real terms, the lower range of the forecast that I made last August.

15. On the trade front, in 2010 with a growth of 17.3 per cent in total exports of goods, we swiftly regained all ground lost in 2009 when total exports of goods plunged by 12.7 per cent, the biggest annual drop on record.However, exports of goods went down sharply in mid-2011 due to slackening demand as a result of the unstable economic recovery in Europe and the US and the worsening sovereign debt crisis in the Eurozone.The third quarter even saw negative year-on-year growth, the first since the fourth quarter of 2009.Exports steadied somewhat in the fourth quarter, and the growth for 2011 as a whole was 3.6 per cent in real terms.

16. Domestic demand was also severely hit during the financial tsunami, but began to rebound in the second half of 2009 as the external environment stabilised and the Government's measures to counter the crisis took effect.Domestic demand gathered pace in 2010 and remained resilient in 2011, thereby rendering a key driving force of overall economic growth.Riding on an improving employment situation and rising incomes, private consumption expenditure maintained our growth momentum in all four quarters of last year.Overall investment also continued to expand last year.Nevertheless, the highly uncertain external environment has weighed on business confidence.Enterprises have become more cautious recently.

17. Turning to inflation.The economy slowed down in 2009, and we experienced a few months of deflation.To tackle the financial crisis, major advanced economies introduced quantitative easing.They reduced interest rates to a super-low level near zero, leading to a surge in the prices of food and commodities in the international market.The ultra-loose monetary environment brought large inflows of funds into Asia and Hong Kong in 2009, further fuelling inflation and increasing the risk of asset-price bubbles in the region.Inflationary pressure on Hong Kong rose gradually in 2010.

18. Inflation became more evident in 2011.The underlying inflation rate for the year averaged 5.3 per cent, a marked rise from the 1.7 per cent in 2010.With the slowdown in local economic growth and the gradual decline in food inflation in the Mainland, the rising trend in Hong Kong's inflation tapered in the fourth quarter of 2011.

19. There have been marked fluctuations in the property market in the past few years.Triggered by the financial tsunami, property prices experienced a sharp drop in late 2008, but began to surge since early 2009 surpassing the peak in 1997.This is attributed to the economic recovery and the exceptionally low interest rates, coupled with the relatively tight supply of residential flats.To ensure a healthy and stable development of the property market, we introduced measures in four areas, namely (1) increasing flat supply; (2) curbing property speculation; (3) preventing expansion in mortgage lending; and (4) ensuring transparency in the property market.Our aim is to prevent the risk of asset-price bubbles from worsening, and ensure the stability of our property market, financial system and macro economy.

20. I am pleased to see that these measures have achieved some results.Speculative activities have abated, the average loan-to-value ratio of new residential mortgages has been falling gradually, and flat prices have started to come down since last June.Despite the recent stabilisation of the property market, the low-interest environment persists, and the developed countries may again resort to quantitative easing policies to boost their sluggish economies.I shall, therefore, continue the strategy that has proven to be effective in facilitating the healthy and stable development of the property market.

21. Despite the sharp swings in the global economic and financial environment over the past few years, we withstood the severe blow dealt by the financial tsunami in 2008 and 2009, and achieved an above-trend growth in 2010 and 2011.In the third quarter of 2011, however, the economic situation in Europe and the US became unstable again due to the worsening sovereign debt crisis in Europe.This threatened the entire European banking industry and several larger European economies, including Italy and Spain.Worse still, the unprecedented downgrade of the US's sovereign rating has caused wild gyrations in the financial markets.Yet, European countries and the US are set to step up their fiscal austerity measures, raising concern about a possible double-dip recession in the global economy.

22. We implemented a package of fiscal stimulus, job creation and relief measures worth nearly $110 billion in the three fiscal years from 2008-09 to 2010-11.On the back of our strategy of "stabilising the financial system, supporting enterprises and preserving employment", the downward pressure brought by the financial tsunami on Hong Kong's economy eased significantly, and the pace of worsening in the job market also slowed down.

23. The relief measures adopted by the Government have increased people's cash in hand and provided timely assistance to those in need.Short-term jobs, temporary posts and internship opportunities have been offered to help people in need change jobs and better equip themselves for returning to the labour market in better times.Furthermore, the Government's years of heavy investment in infrastructure has laid a solid foundation for the future and created ample job opportunities.

24. To tackle the credit crunch triggered by the global financial crisis, we also introduced a series of countermeasures, including the Special Loan Guarantee Scheme and the enhanced Small and Medium Enterprises Loan Guarantee Scheme.Since 2008, loans worth more than $100 billion have been approved, benefiting over 20 000 enterprises and indirectly preserving 350 000 jobs.

25. During the economic recession in the wake of the financial tsunami, we lost only 62 000 jobs, less than half the number lost during the Asian financial turmoil.This reflects that our measures have brought about the positive effect of preserving social and economic stability through supporting employment.The unemployment rate even dropped to a 13-year low of 3.2 per cent in mid-2011.However, as the external environment worsened in the second half of the year, the unemployment rate rebounded slightly to 3.3 per cent towards the end of 2011, which still represented full employment.

26. In 2011-12, Hong Kong was under the threat of inflation.We introduced an array of measures worth over $60 billion with a view to combating inflation and leaving wealth with our people.Some of the measures are still working effectively.With appropriate measures in place, we have alleviated the impact of economic cycles on the public.

27. The financial tsunami that broke out at the end of 2008 is far from over and is still battering the global economy.In the face of adversity, our people have demonstrated perseverance and wisdom.Drawing on our resources, the Government has introduced a series of strategic measures to stabilise our economy and help those in need for the sustained development of our society.These joint efforts have helped us come through crisis after crisis.

Economic Outlook for 2012

28. Given the bleak economic prospects in Europe and the US, the risk of a sharp deterioration of the external environment is increasing.Despite their relatively strong economic fundamentals, Asian and emerging market economies have seen a noticeable slowdown in their growth momentum recently.As a result, our external demand has been faltering.I am not optimistic about Hong Kong's export performance in the first half of this year, and if exports of goods were to plunge in the first quarter, the overall economy might take a downturn in that quarter.

29. Fortunately, many Asian economies have started to ease their monetary policies, and there is also much policy room for the Mainland to bolster economic growth.So long as the European debt crisis does not escalate into a full blown crisis, the Asian region should be able to serve as an anchor for the global economy.Hong Kong's external trade may also see some improvement in the second half of this year.

30. I shall introduce measures worth nearly $80 billion in this year's Budget to better prepare our people for the difficult time ahead.Besides supporting enterprises and people in meeting challenges, these measures will help ease the burden of inflation on people.This is a strong package of measures and would help stimulate the economy 1.5 percentage points in 2012.The measures, coupled with other positive factors including our strong economic fundamentals, the robust performance of the tourism industry and a wealth of infrastructure projects being rolled out, will help tide us over a difficult and thorny year.Even so, economic growth will inevitably be lower than the average growth rate over the past decade.I forecast GDP growth of one to three per cent in real terms for 2012.

31. The range between the upper and lower boundaries of this forecast is larger than the usual one percentage point.This reflects the unusually large degree of uncertainties in the external environment this year, especially when the European debt crisis is still twisting and turning.It is difficult to predict with any certainty the possibility of a severe recession in Europe and, if so, the precise ramifications on Asia.

32. As regards inflation, with global food and commodity prices retreating from peaks and local costs easing off as a result of economic slowdown, I believe the inflation rate would ease quite visibly in the second half of 2012.The average underlying inflation rate for the year is expected to drop from 5.3 per cent in 2011 to four per cent this year.The headline inflation rate for 2012 is estimated at 3.5 per cent after taking account of the effects of the one-off measures I am about to propose.

(To be continued)