After a marked slowdown from 10.2 per cent in 2000 to 0.5 per cent in 2001, the Hong Kong economy staged a moderate rebound by 2.3 per cent in 2002. Growth revived progressively over the course of the year, upon increased impetus from the external sector. But the domestic sector remained weak, with a shrinkage in both consumer spending and overall investment expenditure. Amidst more extensive corporate downsizing and lay-offs, the unemployment rate went distinctly higher, while labour earnings and wages drifted lower in money terms. Overall consumer prices had an enlarged decrease, due in part to slack domestic demand and soft import prices, and in part to the Government's special relief measures implemented during the year.

THE Hong Kong economy, having slowed down markedly in 2001, showed a progressive revival over the course of 2002. The Gross Domestic Product (GDP) had a 2.3 per cent growth in real terms in 2002, up from a meagre 0.5 per cent growth in 2001. With a generally subdued economic performance carried over from the preceding months, GDP was down by 0.6 per cent in real terms in the first quarter of 2002 over a year earlier. Then, along with reviving external trade, GDP resumed positive growth at 0.8 per cent in the second quarter, followed by distinctly faster growth at 3.4 per cent in the third quarter and 5.1 per cent in the fourth quarter. On a seasonally adjusted quarter-to-quarter comparison, GDP went up through the four quarters of 2002, with increases of 0.3 per cent, 1.1 per cent, 2.0 per cent and 1.7 per cent respectively in real terms.

    The impetus to overall economic growth came primarily from the external sector. Total exports of goods reverted from a decline in the first quarter of 2002 to a positive growth in the second quarter, which then accentuated sharply in the third quarter and further in the fourth quarter. Within the total, exports to markets in East Asia, including notably the mainland of China (the Mainland), were particularly robust, attaining double-digit growth across many markets for the year as a whole. Exports to both the United States and the European Union also staged a visible rebound in the latter part of the year. Exports of services fared even better, with a broad-based surge in inbound tourism, offshore trade and transportation services.

    On the other hand, the domestic sector put up a relatively weak performance. Consumer spending shrank in 2002, for the first time since 1998. Consumers were generally less willing to spend, in face of the worsened employment and income conditions and distinct fall-off in the asset markets inflicting a negative wealth effect. Declines in consumer spending occurred through the four quarters of the year. Overall investment spending also contracted in 2002, mainly attributable to a plunge in machinery and equipment intake amidst an uncertain business outlook. Nevertheless, with machinery and equipment intake reverting to an increase towards the year-end, and even with building and construction activity concurrently showing a relapse, total investment spending turned up to a modest rise in the fourth quarter.

    The labour market remained slack in overall terms in 2002, amidst more extensive downsizing and lay-offs in the corporate sector. The seasonally adjusted unemployment rate jumped from 6.2 per cent in the fourth quarter of 2001 to a new high of 7.8 per cent in MayJuly 2002. Then, as total employment improved along with an upturn in economic activity, the seasonally adjusted unemployment rate fell back somewhat in the second half of the year, to 7.2 per cent in the fourth quarter. The underemployment rate hovered within a higher range of 2.8 per cent to 3.2 per cent during 2002. Despite a renewed increase in the latter part of the year, total employment still fell by 0.6 per cent for 2002 as a whole, in contrast to a 1.8 per cent increase in total labour force. As to labour earnings, there was a modest decline by an average of 1.0 per cent in money terms in the first three quarters of 2002 over a year earlier.

    The residential property market fell back further in 2002, as demand was curbed by high unemployment and moderated income, and as the abundant supply of new flats sapped buying interest. There was a brief pick-up in transactions in the second quarter, on the back of encouraging land auction results in April and June and the Government's announcement in early June that it would resume the sale of subsidised sale flats, yet in a cautious and orderly manner, upon expiry of the 10-month moratorium. Trading activities soon faltered, upon the unemployment rise and with growing uncertainties in the external environment also dampening sentiment. But with the Government's announcement in mid-November of nine measures to stabilise the housing market, coupled with improved employment conditions, the market was reactivated somewhat towards the year-end. Amidst the generally weak sales market, flat prices drifted progressively lower during the year, cumulating to a distinct further decline by an average of 12 per cent for 2002 as a whole. The rental market likewise weakened, with flat rentals falling on average by 13 per cent for the whole year.

    Overall consumer prices had fallen for 50 consecutive months by December 2002. For 2002 as a whole, the Composite Consumer Price Index was on average down by 3.0 per cent, after a 1.6 per cent decrease in 2001. Part of this decline was due to the special relief measures announced in the 2001 Policy Address and the 200203 Budget, including the two rounds of rates concession and the waiver of water and sewage charges, which had the combined effect of lowering the Composite CPI for the year by 1.1 percentage points. Moreover, local consumer prices were kept down by slack demand, keen competition in the retail market, and downward adjustments in labour wages and property rentals. Meanwhile, import prices remained generally soft, though with a moderated decline towards the year-end along with a weaker US dollar and a pick-up in world commodity prices.