The Economy in 2003

External Trade

External trade was buoyant throughout 2003, sustaining strong growth in all four quarters of the year. This was attributable to the generally improved global economic environment during the year, enhanced price attractiveness of Hong Kong's exports stemming from the exchange rate movements and the domestic cost adjustments, as well as the rising competitiveness of Mainland products as the main source of Hong Kong's re-exports to the overseas markets. The war in Iraq and the outbreak of SARS had inflicted only brief and limited impact on Hong Kong's exports. The growth in exports in the third and fourth quarters remained distinct even against a higher base of comparison in the same period a year earlier.

Total exports of goods (comprising re-exports and domestic exports) surged by 14.0 per cent in real terms in 2003, after an already notable growth of 8.6 per cent in 2002. Performance was favourable all through the year, with year-on-year increases by 19.1 per cent, 14.3 per cent, 9.8 per cent and 14.2 per cent respectively in real terms in the four quarters. On a seasonally adjusted quarter-to-quarter comparison, total exports of goods rose by 3.4 per cent, 1.9 per cent and 1.5 per cent respectively in real terms in the first three quarters of 2003, and then picked up more sharply to a 6.2 per cent leap in the fourth quarter. Analysed by major market, the Mainland remained the largest market for Hong Kong's total exports of goods, accounting for 43 per cent of the total value in 2003. This was followed by the United States (with a share of 19 per cent), Japan (5 per cent), the United Kingdom (3 per cent), and Germany (3 per cent).

Re-exports remained the key driver of the overall export growth, surging by 16.1 per cent in real terms in 2003, considerably up from the already impressive growth at 10.9 per cent in 2002. Double-digit increases took place in all four quarters of 2003. On the other hand, the ongoing structural shift towards re-exports and offshore trade continued to impinge upon domestic exports, which contracted further by 7.4 per cent in real terms in 2003, though more moderate than the 11.3 per cent plunge in 2002.

Imports of goods were likewise robust, soaring by 12.8 per cent in real terms in 2003, also sharply exceeding the 7.8 per cent rise in 2002. Year-on-year growth was most distinct in the first quarter of 2003, at 18.7 per cent in real terms. It remained strong in the second quarter, at 10.6 per cent, upon sustained expansion in re-export trade and even with the spread of SARS severely dampening import intake for local use. Then, with the moderation in re-export growth in the third quarter partly offsetting a revival in import intake for local use, imports of goods had a slower growth by 7.9 per cent in the third quarter. This was followed by a re-accelerated growth at 15.0 per cent in the fourth quarter, as re-exports picked up again while import intake for local use rebounded noticeably. On a seasonally adjusted quarter-to-quarter comparison, imports of goods rose by 2.9 per cent in real terms in the first quarter of 2003, yet moderating to a 0.9 per cent increase in the second quarter, before turning up again to increases by 2.6 per cent and 7.0 per cent respectively in the third and fourth quarters. Analysed by major source, the Mainland continued to be the largest source of Hong Kong's imports of goods, accounting for 44 per cent of the total value in 2003. This was followed by Japan (with a share of 12 per cent), Taiwan (7 per cent), the United States (5 per cent), Singapore (5 per cent), and the Republic of Korea (5 per cent) (Chart 7).

Chart 7

Hong Kong's visible trade

(year-on-year rate of change in real terms)

Total exports of goods, including in particular re-exports, continued to surge in real terms in 2003, as did imports of goods.

Yet, with a larger rise in import prices than in export prices, the value of imports of goods grew at a faster pace than that of total exports of goods in 2003. As a result, the visible trade deficit reckoned on a GDP basis widened in absolute terms, to $45.0 billion (or 2.5 per cent of the value of imports of goods) in 2003, from $39.4 billion (2.5 per cent) in 2002.

On invisible trade, exports of services maintained a strong growth momentum in the first quarter of 2003, but they were dented severely by the spread of SARS in Hong Kong in the second quarter. Nevertheless, backed by a swift rebound in the third quarter and a further pick-up in the fourth quarter, exports of services still attained an appreciable growth at 5.5 per cent in real terms in 2003, albeit milder than the 12.2 per cent surge in 2002. On a year-on-year comparison, exports of services leaped by 12.7 per cent in real terms in the first quarter of 2003, before falling abruptly by 12.0 per cent in the second quarter as inbound tourism and related business plummeted upon the SARS impact. As such business bounced up strongly thereafter, exports of services increased again, by 7.8 per cent in the third quarter, and then distinctly more by 11.8 per cent in the fourth quarter. On a seasonally adjusted quarter-to-quarter comparison, exports of services rose by 0.9 per cent in real terms in the first quarter of 2003, before plummeting by 19.7 per cent in the second quarter. A sharp turnaround ensued, with a 33.5 per cent jump in the third quarter and a further 2.2 per cent increase in the fourth quarter.

Imports of services were likewise badly hit by SARS in the second quarter. Notwithstanding the subsequent rebound, imports of services still went down by 4.4 per cent in real terms in 2003, following a meagre 0.2 per cent rise in 2002. On a year-on-year comparison, imports of services shrank in both the first and second quarters of 2003, by 3.9 per cent and 19.6 per cent respectively in real terms, outweighing the increases by 0.5 per cent and 4.2 per cent respectively in the third and fourth quarters. On a seasonally adjusted quarter-to-quarter comparison, imports of services contracted by 3.8 per cent in real terms in the first quarter of 2003 and then plunged by 17.8 per cent in the second quarter, before rebounding markedly by 27.8 per cent in the third quarter and rising further by 2.9 per cent in the fourth quarter.

As the value of exports of services went up whereas that of imports of services moved lower, the invisible trade surplus reckoned on a GDP basis widened further to $161.1 billion or 85.1 per cent of the value of imports of services in 2003, from $144.5 billion or 74.7 per cent in 2002. This more than offset the enlarged visible trade deficit to yield a combined surplus of $116.1 billion in 2003, equivalent to 5.9 per cent of the total value of imports of goods and services in that year, as compared to $105.1 billion or 5.9 per cent in 2002 (Chart 8).

Chart 8

Domestic Demand

Local consumer spending faced a severe blow in the second quarter of 2003 upon the spread of SARS. Then, with the epidemic brought under control, local consumer spending recuperated progressively in the third quarter, followed by an even more visible pick-up in the fourth quarter. Added to this was a strong resurgence in inbound tourism. For 2003 as a whole, although the volume of retail sales still decreased marginally by 0.6 per cent, this compared favourably with the 2.6 per cent dip in 2002. Private consumption expenditure (PCE) likewise staged a notable turnaround after the waning of SARS. On a year-on-year comparison, PCE went down by 1.8 per cent and 3.5 per cent respectively in real terms in the first two quarters of 2003, but increased again by 1.6 per cent in the third quarter, for the first time since end-2001. As consumer sentiment improved further in tandem with the upturn in the economy, a rally in the local stock market and a rebound in the property market, PCE growth accentuated to 3.6 per cent in the fourth quarter. For 2003 as a whole, PCE showed virtually no change in real terms, having contracted by 1.2 per cent in 2002. The pick-up in consumer spending in late 2003 occurred across almost all the major consumer goods and services. On a seasonally adjusted quarter-to-quarter comparison, PCE fell by 0.1 per cent and 1.4 per cent respectively in real terms in the first two quarters of 2003, and then bounced up by 3.9 per cent and 1.2 per cent respectively in the third and fourth quarters.

Amidst the fiscal restraint, government consumption expenditure (GCE) reckoned on a national accounts basis registered only modest growth in the first three quarters of 2003, by 1.3 per cent, 0.4 per cent and 0.5 per cent respectively in real terms over a year earlier. While the growth rate re-accelerated to 5.6 per cent in the fourth quarter, this was due in part to a low base of comparison a year earlier. Also contributing were the one-off compensatory payments made to those civil servants retiring under the Second Voluntary Retirement Scheme. For 2003 as a whole, GCE edged up by 1.9 per cent in real terms, still slower than the 2.4 per cent growth in 2002. On a seasonally adjusted quarter-to-quarter comparison, GCE increased throughout the four quarters of 2003, by 1.0 per cent, 0.1 per cent, 1.3 per cent and 3.0 per cent respectively in real terms.

Overall investment spending, as represented by gross domestic fixed capital formation (GDFCF), regained some strength in the latter part of 2003, after the setback amidst the SARS impact in the earlier months. GDFCF still grew by 3.5 per cent in real terms in the first quarter of 2003 over a year earlier, but relapsed to a sharp decline by 5.7 per cent in the second quarter as business conditions worsened upon the spread of SARS. Then, with the ensuing recovery in economic activity, the decline in GDFCF narrowed to a mere 0.6 per cent in the third quarter, and rebounded to a 2.5 per cent rise in the fourth quarter. For 2003 as a whole, GDFCF fell only marginally by 0.1 per cent in real terms, much improved from the 4.3 per cent dip in 2002.

There was a clear resurgence of interest in acquisition of machinery and equipment during most of the year, other than the brief relapse in the second quarter. On a year-on-year comparison, expenditure on machinery, equipment and computer software soared by 11.9 per cent in real terms in the first quarter of 2003. After a temporary decrease by 2.0 per cent in the second quarter, the expenditure surged ahead by 4.9 per cent in the third quarter and even more by 10.2 per cent in the fourth quarter as the business outlook brightened. The intake of several aircraft in the second half of the year also helped. For 2003 as a whole, expenditure on machinery, equipment and computer software rose by 6.1 per cent in real terms, reversing the 9.1 per cent decline in 2002.

On the other hand, building and construction output remained subdued in overall terms throughout the year. Expenditure on building and construction fell back by 6.9 per cent in real terms in 2003, after a modest increase by 1.2 per cent in 2002. On a year-on-year comparison, the decreases were 3.5 per cent, 8.4 per cent, 6.7 per cent and 9.3 per cent respectively in real terms in the four quarters of 2003. The slump was mostly attributable to a distinct fall-off in private sector building work, despite a rise in consents for new building projects during the year. The increase in private sector civil engineering work rendered only a marginal offset. Public sector expenditure on building and construction was also slack in the first half of the year, upon the winding down of work on the KCR West Rail and Ma On Shan Extension. Nevertheless, it regained some momentum in the second half of the year, upon commencement of several new infrastructural projects including the Hong Kong section of the Hong Kong-Shenzhen Western Corridor and the Deep Bay Link (Chart 9).

Chart 9

Main components of domestic demand

(year-on-year rate of change in real terms)

Consumer spending suffered a severe blow in the second quarter of 2003 upon the impact of SARS. Yet it staged a distinct turnaround in the third and fourth quarters, as the SARS impact dissipated and as overall economic activity turned around. Overall investment spending also picked up in the latter part of the year, amidst renewed interest in acquisition of machinery and equipment. As to government consumption expenditure, there was only a modest growth amidst continued fiscal restraint.

Net Output or Value Added by Economic Activity

As reflected in quarterly GDP by major economic sectors at constant prices, net output or value added for all the service sectors taken together went higher by an average of 3.7 per cent in real terms in the first three quarters of 2003 over a year earlier, slightly exceeding the 3.5 per cent gain in 2002. Analysed by constituent sector and on a year-on-year comparison in real terms, net output in the wholesale, retail and import/export trades, restaurants and hotels rose strongly by 9.5 per cent in the first three quarters of 2003. This was attributable to a marked increase in net output in the import/export trade, more than offsetting the declines observed in the wholesale and retail trades and in restaurants and hotels owing to the SARS impact in the second quarter. Meanwhile, net output in financing, insurance, real estate and business services moved up by 3.6 per cent, mainly underpinned by improved performance of banking services and also buoyancy in stock brokerage amidst an upsurge in stock market turnover. On the other hand, net output in transport, storage and communications as well as in community, social and personal services shrank by 0.2 per cent and 1.0 per cent respectively. These largely reflected the downturn in air and land transport services and in recreation and entertainment services, upon the spread of SARS in the second quarter.

Net output in the local manufacturing sector was reduced distinctly, by an average of 10.2 per cent in real terms in the first three quarters of 2003 over a year earlier, further to a 9.8 per cent fall in 2002. The weak performance of domestic exports and ongoing relocation of production processes outside Hong Kong largely contributed. As to the construction sector, net output dropped by an average of 4.3 per cent in real terms in the first three quarters of 2003 over a year earlier, after a 0.8 per cent fall in 2002. This was mainly due to winding down of some major railway projects earlier in the year and generally slack building activity.

The Labour Market

The labour market slackened visibly in the first half of 2003, but underwent a progressive improvement in the second half, as the economy recovered from the severe setback inflicted by SARS earlier in the year. Indicative of this, the seasonally adjusted unemployment rate rose from 7.2 per cent in the fourth quarter of 2002 to 7.5 per cent in the first quarter of 2003, and markedly further to 8.6 per cent in the second quarter and then to a peak of 8.7 per cent in May-July. Nevertheless, along with the upturn in economic activity, the seasonally adjusted unemployment rate fell back to 8.3 per cent in the third quarter and notably further to 7.3 per cent in the fourth quarter. For 2003 as a whole, the unemployment rate averaged 7.9 per cent, which however was still considerably higher than that in 2002, at 7.3 per cent. Furthermore, there was a clear lengthening in the median duration of unemployment, from 90 days in the fourth quarter of 2002 to 109 days in the fourth quarter of 2003, as well as a surge in the proportion of persons unemployed for six months or more, from 30 per cent to 36 per cent.

The underemployment rate exhibited a broadly similar profile. It jumped to a peak of 4.3 per cent in the second quarter of 2003, after a modest decline from 3.1 per cent in the fourth quarter of 2002 to 2.9 per cent in the first quarter of 2003. Conceivably, this was due to a significant proportion of employees having been temporarily suspended from work or asked to take no-pay leave during the SARS period. Yet as SARS waned and the affected employees gradually returned to their jobs, the underemployment rate came down again, to 3.6 per cent in the third quarter and further to 3.3 per cent in the fourth quarter. For 2003 as a whole, the underemployment rate averaged 3.5 per cent, which however was also appreciably above that in 2002, at 3.0 per cent (Chart 10).

Chart 10

Unemployment and underemployment rates

Both the unemployment rate and the underemployment rate surged to record highs in the summer of 2003, consequential to an abrupt economic downturn under the impact of SARS. Yet they came down visibly afterwards, in tandem with a distinct rebound in overall economic activity.

For the employed persons, work intensity dwindled noticeably during the second quarter of 2003, amidst the spread of SARS. The median hours of work were reduced to 45 hours per week in the second quarter, from 48 hours per week in both the fourth quarter of 2002 and the first quarter of 2003. Yet in line with the revival in economic activity, work intensity rose again to 48 hours per week in the third and fourth quarters. For 2003 as a whole, the median hours of work stood at 48 hours per week, the same as in 2002. The proportions of employed persons working for 50 hours or more per week and for 60 hours or more per week, at 41 per cent and 25 per cent respectively in the fourth quarter of 2003, were even slightly higher than those of 40 per cent and 24 per cent in the fourth quarter of 2002.

Total employment as enumerated from households contracted by 0.3 per cent in 2003, yet this was smaller than the 0.6 per cent decrease in 2002. On a year-on-year comparison, employment growth slowed down from 0.8 per cent in the first quarter of 2003 to 0.5 per cent in the second quarter, and then turned negative in the third quarter with a decline of 1.7 per cent amidst the SARS impact. In the fourth quarter, the decrease narrowed visibly to 0.6 per cent, in line with improved performance of the economy after SARS waned. Total labour force expanded only mildly by 0.4 per cent per cent in 2003, lesser than the 1.8 per cent rise in 2002. This was entirely attributable to a decline in the labour force participation rate, especially that for persons aged 15-19 and aged 50 and above. On a year-on-year comparison, labour force growth moderated over the course of 2003, turning from increases of 1.3 per cent and 1.5 per cent respectively in the first and second quarters to decreases of 0.7 per cent and 0.5 per cent in the third and fourth quarters (Chart 11).

Chart 11

Total labour force and total employment

(year-on-year rate of change)

In the first three quarters of 2003, labour force growth continued to outpace employment growth. Yet the difference between these two growth rates was markedly reduced in the fourth quarter, mainly due to relatively improved employment on the back of a pick-up in overall economy activity. As a result, the unemployment rate fell back visibly by the year-end.

Employment as enumerated from business establishments shrank by 3.3 per cent in September 2003 from a year earlier, following decreases of 2.5 per cent in March and 3.8 per cent in June. For the first nine months of 2003 as a whole, the decrease averaged at 3.2 per cent, exceeding that of 1.6 per cent in 2002. On a seasonally adjusted quarter-to-quarter comparison, total employment nevertheless edged up by 0.1 per cent in September 2003, after declining by 1.7 per cent in March and 1.6 per cent in June. The downtrend since mid-2001 was thus arrested. Increased labour demand, alongside the turnaround in business activity after the waning of SARS, largely contributed.

Taking all the service sectors surveyed together, employment was 2.6 per cent down in September 2003 from a year earlier, further to decreases of 1.4 per cent in March and 2.2 per cent in June. Analysed by major constituent sector, employment in storage and communications continued on a marked decline, by 13.0 per cent in September 2003 from a year earlier, amidst more downsizing and lay-offs in the telecommunications sector, predominantly in the early part of the year. Yet employment in restaurants and hotels had a moderated decrease as compared to a few months earlier, by 8.7 per cent, aided by the surge in inbound tourism and revival in local consumer spending. Employment in the retail trade likewise went down, by 6.4 per cent, notwithstanding the generally improving business conditions. Employment in water transport, air transport and services allied to transport was reduced by 4.4 per cent, with more distinct decreases seen in air transport services and in air ticket and travel agents. Employment in the wholesale and import/export trades contracted by 4.3 per cent, mainly reflecting a higher base of comparison a year earlier. Employment in financing, insurance, real estate and business services had a smaller reduction, by 0.5 per cent. On the other hand, employment in community, social and personal services increased by 3.9 per cent, underpinned by strong demand for the relevant services.

As to the local manufacturing sector, employment continued to drop, by 9.1 per cent in September 2003 from a year earlier, albeit lesser than the dips of 9.4 per cent in March and 13.8 per cent in June. Continued weak performance of domestic exports and ongoing relocation of production processes outside Hong Kong remained the major contributory factors.

Employment of manual workers at building and construction sites dwindled by 8.5 per cent in September 2003 from a year earlier, yet this was much smaller than the plunges of 13.3 per cent in March and 20.2 per cent in June. Within the total for September 2003, employment at private sector sites plummeted by 10.2 per cent, partly due to reduced work on some of the residential and commercial development projects along the MTR Tung Chung Line. Employment at public sector sites was down by 6.0 per cent, amidst still slack building activity under the Public Housing Programme and winding down of the KCR West Rail project. Taking into account off-site workers and related professional and support staff, employment in the entire building and construction sector was lower by 9.0 per cent in the third quarter of 2003 than a year earlier, following declines of 3.5 per cent in the first quarter and 5.4 per cent in the second quarter.

Overall labour earnings in the private sector eased further by 1.8 per cent in money terms in the third quarter of 2003 over a year earlier, after a decrease of 2.0 per cent in the first quarter, and an enlarged drop of 2.5 per cent in the second quarter owing to the SARS impact. Discounting a larger decline in consumer prices as reflected by the Composite CPI, overall labour earnings were nevertheless up by 1.9 per cent in real terms in the third quarter of 2003 over a year earlier, after virtually nil change in the first quarter and a fall of 0.1 per cent in the second quarter. For the first three quarters of 2003 as a whole, overall labour earnings were reduced by an average of 2.1 per cent in money terms from a year earlier, exceeding the 1.1 per cent decrease in 2002. In real terms, labour earnings increased much less for the first three quarters of 2003 as a whole, by an average of 0.6 per cent over a year earlier, as against the 2.0 per cent rise in 2002. On a seasonally adjusted quarter-to-quarter comparison, overall labour earnings rose marginally by 0.2 per cent in money terms in the third quarter of 2003, having been down by 1.0 per cent in the first quarter and 0.7 per cent in the second quarter. The downtrend over the preceding seven quarters was thus reversed. In real terms, overall labour earnings picked up more, by 1.5 per cent in the third quarter of 2003, after recovering from a fall of 0.6 per cent in the first quarter to a rise of 0.5 per cent in the second quarter.

Overall labour wages in the private sector likewise continued to fall, by 2.1 per cent in money terms in September 2003 over a year earlier, following a decrease of 1.5 per cent in March, and a larger decrease of 2.5 per cent in June due to the SARS impact. Discounting an enlarged decline in consumer prices as measured by the CPI(A), overall labour wages increased by 0.7 per cent in real terms in September 2003 over a year earlier, having risen by 0.3 per cent in March and then edged down by 0.1 per cent in June. For the first nine months of 2003 as a whole, overall labour wages fell by an average of 2.1 per cent in money terms over a year earlier, but edged up by an average of 0.3 per cent in real terms. In 2002, there was a decline of 1.0 per cent in money terms, yet an increase of 1.3 per cent in real terms (Chart 12).

Chart 12

Earnings and wages

(year-on-year rate of change in money terms)

Amidst the slackened labour market conditions, overall labour earnings and wages continued on a decline in money terms in 2003. The decline nevertheless showed some narrowing since mid-year.

Analysed by economic sector, labour earnings in money terms fell virtually across-the-board. For all the service sectors surveyed taken together, labour earnings went down by 2.0 per cent in money terms in the third quarter of 2003 over a year earlier, further to declines of 2.1 per cent in the first quarter and 3.0 per cent in the second quarter. Yet, discounting the decrease in consumer prices, labour earnings still gained by 1.6 per cent in real terms in the third quarter of 2003 over a year earlier, as against falls of 0.1 per cent in the first quarter and 0.6 per cent in the second quarter. Analysed by major constituent sector, earnings in community, social and personal services and in restaurants and hotels were slashed by 5.7 per cent and 5.2 per cent respectively in money terms, or 2.2 per cent and 1.7 per cent in real terms, in the third quarter of 2003 over a year earlier. Earnings in transport, storage and communications, in the wholesale, retail and import/export trades, and in financing, insurance, real estate and business services decreased to a lesser extent, by 0.6-1.8 per cent in money terms. In real terms, there were nevertheless increases, by 1.8-3.1 per cent. As to the local manufacturing sector, labour earnings were down by 3.6 per cent in money terms in the third quarter of 2003 from a year earlier, lesser than the decrease of 5.1 per cent in the first quarter but larger than the decrease of 2.2 per cent in the second quarter. In real terms, labour earnings in this sector edged lower by 0.1 per cent in the third quarter of 2003 from a year earlier, as compared to a fall of 3.2 per cent in the first quarter and a rise of 0.3 per cent in the second quarter.

As to labour wages in the service sectors, those in restaurants and hotels and in personal services were lower by 5.0 per cent and 4.1 per cent respectively in money terms in September 2003 than a year earlier. In real terms, the corresponding decreases were 2.3 per cent and 1.3 per cent. Wages in transport services and in the wholesale, retail and import/export trades fell less, by 1.6 per cent and 1.5 per cent respectively in money terms. In real terms, there were still increases by 1.1 per cent and 1.3 per cent. Wages in financing, insurance, real estate and business services had an even smaller decline by 0.3 per cent in money terms, and thus a larger increase by 2.5 per cent in real terms. As to the local manufacturing sector, wages continued to fall, by 3.7 per cent in money terms or 1.0 per cent in real terms in September 2003 over a year earlier.

The Property Market

The property market as a whole showed a distinct turnaround in 2003, mostly occurring in the latter part of the year, from the general sluggishness in the past few years. The markets for residential property and shopping space both staged a noticeable upturn in the second half of the year, along with improved performance of the overall economy and rally in the stock market. The signing of CEPA in June and implementation of the Individual Visit Scheme for Mainland visitors to Hong Kong in July also contributed. The market for office space likewise turned better towards the end of the year.

More specifically, the sales market for private residential property remained sluggish in the first half of 2003, but rebounded distinctly in both transaction volume and prices in the second half of the year. Following the Government's promulgation of nine policy measures to stabilise the housing market in late 2002, transactions had a brief pick-up in early 2003, but slackened subsequently amidst renewed worries over job security and income stability. Acquisition interest was curtailed further during the period from mid-March to early June, upon the impact of SARS. The ample supply of new flats in the mass market continued to cause a drag. Nevertheless, market sentiment started to improve in early June, boosted by an improved outlook for the economy and a more sanguine global economic environment. This was particularly so after the signing of CEPA in June and implementation of the Individual Visit Scheme for Mainland visitors to Hong Kong in July. The announcement by the Government in October of further measures to engender steady development of the housing market also helped. Developers actively resumed sales in the primary market, which generally received a good response. This led many developers to reduce or withdraw the price discounts and other concessions offered earlier. Meanwhile, activity in the secondary market also took a notable upturn. Flat prices bottomed out in the third quarter, and bounced up visibly in the fourth quarter. In the luxury end of the market, strong buying interest re-emerged in the latter part of the year, leading to a more pronounced rebound in prices. The Government's new policy measure to attract investment immigrants to Hong Kong may have rendered some lift to this segment.

On a quarter-to-quarter comparison, flat prices on average drifted lower by 4 per cent, 5 per cent and 1 per cent respectively in the first three quarters of 2003, but rebounded to an increase of 8 per cent in the fourth quarter. For 2003 as a whole, while flat prices on average still fell by 1 per cent, this was much narrowed from the 12 per cent drop in 2002. Yet, compared with the peak level in the third quarter of 1997, flat prices in the fourth quarter of 2003 remained substantially lower, by an average of 62 per cent.

As to the rental market for private residential flats, leasing activity likewise turned more active in the second half of 2003, after remaining quiet in the first half of the year. Flat rentals, having eased during most of 2003, tended to stabilise in the fourth quarter. On a quarter-to-quarter comparison, private housing rentals on average declined by 3 per cent, 4 per cent and 2 per cent respectively in the first three quarters of 2003, but were broadly stable in the fourth quarter. For the year as a whole, there was on average a fall of 9 per cent, lesser than the 14 per cent dip in 2002. Against the peak level in the third quarter of 1997, private housing rentals were significantly down in the fourth quarter of 2003, by an average of 48 per cent (Chart 13).

Chart 13

Prices and rentals of residential property

(1999=100)

Having fallen during most of 2003, flat prices picked up visibly in the fourth quarter, while rentals tended to stabilise, amidst a distinct improvement in the overall economic performance and outlook.

On commercial property, the rental market for office space weakened further during most of 2003, but became more active towards the end of the year. The abundant supply of new and existing office space, coupled with the SARS impact, exerted much downward pressure on rentals in the first half of the year. Yet, after the waning of SARS, such downward pressure on rentals tended to dwindle in the second half. With rentals for Grade A office space having fallen to a more attractive level and with an upturn in business sentiment, leasing demand for office space strengthened somewhat in the latter part of the year. Also, more tenants were willing to relocate their offices from buildings which were older or in secondary locations to better ones. On a quarter-to-quarter comparison, office rentals declined on average by 4 per cent, 6 per cent and 3 per cent respectively in the first three quarters of 2003, but rose back by 2 per cent in the fourth quarter. For 2003 as a whole, the decrease on average was 12 per cent. As to the sales market, activity remained subdued in the first half of 2003. But investor interest was rekindled markedly in the second half of the year, stimulated in part by the signing of CEPA in June and perhaps more so by the better economic outlook. On a quarter-to-quarter comparison, prices for office space on average went down by 4 per cent and 5 per cent respectively in the first and second quarters of 2003, yet rebounded by 4 per cent in the third quarter and further by 7 per cent in the fourth quarter. For 2003 as a whole, there was on average a slight increase of 2 per cent. Against their respective peak levels in 1994, prices and rentals for office space in the fourth quarter of 2003 plunged by an average of 72 per cent and 62 per cent respectively (Chart 14).

Chart 14

Prices and rentals of office space

(1999=100)

Rentals for office space continued to decline during most of 2003, yet rose again mildly in the fourth quarter. Prices showed a distinct upturn in the second half of the year, amidst a resurgence of buying interest.

The rental market for shopping space, having remained bleak in the first quarter and then hard hit by the spread of SARS in the second quarter, revived in the remainder of the year. This was supported by the pick-up in local consumer demand, as well as in inbound tourism particularly following implementation of the Individual Visit Scheme in July. However, there was a mixed performance amongst different retail premises amidst the revival, depending on location and management quality. Retail premises in popular locations and in better-managed shopping malls fared much better. On a quarter-to-quarter comparison, rentals for shopping space, on average having fallen by 3 per cent and 6 per cent respectively in the first and second quarters of 2003, rose back by 1 per cent and 3 per cent in the third and fourth quarters. For 2003 as a whole, there was on average a 5 per cent decline. The sales market performed better, as investor interest grew keener in the second half of the year. There were reportedly a number of transactions involving short-term re-sale with profits. On a quarter-to-quarter comparison, prices for shopping space on average went higher by 1 per cent, 2 per cent and 9 per cent respectively in the second, third and fourth quarters of 2003, after a 2 per cent decrease in the first quarter. For 2003 as a whole, there was on average an increase of 10 per cent. Compared with the peak levels in the third quarter of 1997, prices and rentals for shopping space in the fourth quarter of 2003 plummeted by an average of 53 per cent and 30 per cent respectively.

On industrial property, the rental market remained generally depressed in 2003. Demand for conventional flatted factory space continued to be undermined by the further contraction in local manufacturing activity. Modern industrial premises that could be used as back-up service centres also faced competition from office space in the fringe areas, as rentals for such office space fell to an even lower level. On a quarter-to-quarter comparison, rentals for industrial space on average eased by 2 per cent, 7 per cent and 3 per cent respectively in the first three quarters of 2003, but rose again by 3 per cent in the fourth quarter. For 2003 as a whole, rentals for industrial space on average dipped by 9 per cent. As to the sales market, support came mainly from projects involving the conversion of industrial sites to hotel use amidst the rebound in inbound tourism. On a quarter-to-quarter comparison, prices for industrial space on average went up by 1 per cent and 3 per cent respectively in the third and fourth quarters of 2003, after nil change in the first quarter and a decline of 3 per cent in the second quarter. For 2003 as a whole, prices for industrial space were on average virtually unchanged. Against their respective peak levels in 1994, prices and rentals for industrial space in the fourth quarter of 2003 slumped by an average of 68 per cent and 51 per cent respectively.

On supply of new property, completions of private residential flats decreased by 14 per cent to 29 115 units in 2003, in stark contrast to the 30 per cent increase in 2002. Completions of new office space increased substantially further by 80 per cent to 299 000 square metres in 2003, after a surge of 117 per cent in 2002. On the other hand, completions of shopping space shrank by 15 per cent to 118 000 square metres in 2003, after a 5 per cent rise in 2002. As to industrial property, there was no completion of conventional flatted factory space in 2003, following a plunge of 91 per cent to 3 000 square metres in 2002. Completions of industrial-cum-office space amounted to 15 000 square metres in 2003, after no completion in 2002.

Overall property transactions, as measured by agreements for sale and purchase of property registered with the Land Registry, rose by 2 per cent both in number and total value in 2003. These reversed the corresponding decreases of 3 per cent and 4 per cent in 2002. The increase was concentrated in the second half of the year, reflecting revival in the property market. Analysed by main type of property, transactions in residential property fell slightly by 2 per cent in number but were unchanged in total value in 2003. Meanwhile, transactions in non-residential property increased both in number and total value, by 22 per cent and 15 per cent respectively (Chart 15).

Chart 15

Sale and purchase agreements by broad type of property

Overall transactions went up slightly in number in 2003, as a decrease in transactions of residential property was more than offset by a concurrent increase in transactions of non-residential property.

Price Movement

Overall consumer prices, whilst still coming down for the fifth consecutive year since late 1998, had a smaller decrease in 2003 than in 2002. The moderation in the price decline took place in the first and fourth quarters of 2003, outweighing the accentuated falls in the second and third quarters, which were mainly brought about, first, by the severe impact of SARS on consumer demand, and, then, by the special relief measures granted by the Government to alleviate the SARS impact. The moderation was more appreciable towards the year-end, when both property rentals and labour wages tended to stabilise amidst the generally improved economic conditions. Also, in face of the surge in inbound tourism and revival in local consumer spending, some of the local retailers and service providers reduced the price discounts and other concessions on their goods and services, and some others even raised the prices modestly. A rebound in the prices of retained imports over the past year, amidst a weaker US dollar and an uptrend in world commodity prices, should have contributed as well.

For 2003 as a whole, the Composite CPI went down by 2.6 per cent, smaller than the 3.0 per cent decline in 2002. The year-on-year decrease actually narrowed to 2.0 per cent in the first quarter of 2003, from 2.9 per cent in the fourth quarter of 2002, although this was largely attributable to a low base of comparison owing to the rates concession by the Government in 2002. The decrease then widened to 2.5 per cent in the second quarter under the impact of SARS, and further to 3.6 per cent in the third quarter on account of the new rates concession as well as the waiver of water and sewage charges granted as relief measures by the Government. The decrease narrowed again, to 2.3 per cent in the fourth quarter, upon firming up in retail prices of some of the goods and services, and lapse of the special relief measures.

Analysed by sub-index, the CPI(A) and CPI(B) likewise had lesser declines in 2003, by 2.1 per cent and 2.7 per cent respectively, than in 2002, by 3.2 per cent and 3.1 per cent. As to the CPI(C), the decrease however widened slightly, from 2.8 per cent to 2.9 per cent. This was mainly due to lower rentals for private housing and reduced charges for package tours during the past year, which tended to benefit the higher-income households more. The quarterly profiles of these sub-indices were nevertheless similar, characterised in general by enlarged declines in the second and third quarters yet moderated falls in the first and fourth quarters.

The GDP deflator, as a broad measure of overall price change in the economy, dipped by 5.1 per cent in 2003, distinctly larger than the 3.0 per cent decrease in 2002. Yet the year-on-year decline in the fourth quarter of 2003, by 4.8 per cent, was narrowed from the widening declines in the second and third quarters, by 5.4 per cent and 5.7 per cent respectively, though still exceeding the decline in the first quarter, by 4.6 per cent. The larger fall in the GDP deflator in 2003 than in 2002 was mainly attributable to a worsening in the terms of trade in goods and services as well as an accentuated decline in the price deflator for government consumption expenditure, which more than offset moderated declines in the price deflators for gross domestic fixed capital formation and private consumption expenditure. Within the GDP deflator, the domestic demand deflator and the total final demand deflator nevertheless had lesser decreases in 2003 than in 2002, by 3.8 per cent and 2.4 per cent respectively as against 4.5 per cent and 3.5 per cent (Chart 16).

Chart 16

Main inflation indicators (year-on-year rate of change)

Both the Composite CPI and the GDP deflator continued to decline in 2003, but the decline narrowed visibly towards the year-end.