Hong Kong 2006
Chapter 3:
The Economy
Structure and Development of the Economy
The Economy in 2006
Public Finance
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Hong Kong's economy continued to surge on a broad front in 2006, chalking up an average annual 7.7 per cent growth in the past three years, the fastest sustained pace in two decades.

The impressive performance is attributed largely to a hardworking, highly adaptable workforce, world-class entrepreneurship and the guiding principle of 'market leads, government facilitates'.

The Hong Kong economy continued to expand at a brisk pace in 2006. The Gross Domestic Product (GDP) leaped by 6.9 per cent in real terms, following a robust 7.5 per cent growth in 2005. After a strong 8.1 per cent expansion in the first quarter of 2006, the economy moderated to a 5.6 per cent growth in the second quarter, but soon regained momentum to a 6.8 per cent growth in the third quarter as trade showed renewed vigour. Growth in the fourth quarter remained well above-trend at 7.3 per cent. The financial services sector did very well in 2006, so did the trading and logistics sectors. Hong Kong's economy has become more dynamic and continued to move up the value chain during the year. On a seasonally adjusted quarter-to-quarter comparison, real GDP expanded strongly during the year, by 2.0 per cent, 0.9 per cent, 2.6 per cent and 1.5 per cent respectively in the four quarters.

The robust economic growth attained over the past three years, at an annual average of 7.7 per cent, together with a moderate inflation rate, is a clear indication of sound economic fundamentals, thanks to a highly flexible workforce and excellent entrepreneurship, and also to Hong Kong's pro-market economic policy under the guiding principle of 'Market leads, Government facilitates'. In December 2006, the Executive Broad of the International Monetary Fund (IMF) concluded its annual Article IV Consultation discussions with Hong Kong. The Broad attributed Hong Kong's sustained economic expansion to its skilful macroeconomic management, flexible markets and highly developed financial infrastructure.

The external sector put up a robust performance in 2006, both in goods and services. Boosted by the generally resilient global economy, the Mainland's robust trade flows and the competitiveness advantage from the weakening of the Hong Kong dollar along with the US dollar, merchandise exports attained double-digit growth for the fourth year in a row, a testament to Hong Kong's well-established role as a trading and logistics hub in the region. Invisible trade was likewise robust, with exports of services registering another year of solid growth. Exports of merchandising and other trade-related services, financial and other business services, and transportation services all performed well, although exports of travel services showed more moderate growth due to the slower pace of expansion in inbound tourism in the second half of the year.

The domestic sector was an increasingly steady and important contributor to Hong Kong's economic growth in 2006. Local consumption demand grew solidly throughout the year as the labour market continued to show a broad-based improvement while the asset markets performed equally well to produce a positive wealth effect. Apart from sanguine economic prospects, consumer sentiment was generally upbeat more so with reduced uncertainty over interest rates in the latter part of the year. Overall investment picked up in 2006 for the fourth year in a row. Investment strength was propelled mainly by a sustained surge in machinery and equipment acquisition, a clear indication of investor confidence against the backdrop of a briskly expanding economy, although overall activity in the construction industry remained slack.

The labour market experienced further extensive improvements in 2006. Total employment recorded a 2.1 per cent growth in 2006, slightly higher than the 2.0 per cent increase in 2005. The number of people employed in 2006 was 3.47 million, representing an all-time high. An additional 299 000 new jobs were created between the 2003 trough and end-2006, benefiting workers in all age groups and all occupation categories. In tandem with this growth, the seasonally adjusted unemployment rate fell to a six-year low of 4.4 per cent.

The overall property market, after a general upturn between mid-2003 and mid-2005, showed a steadier performance in 2006. Probably reflecting greater risk awareness, most property prices rose at a slower rate amid moderate trading. Despite this, market sentiment remained positive as the longer-term outlook was well underpinned by improving economic fundamentals. On the leasing front, rentals kept moving up extensively in tandem with solid user demand, but increases in residential flats and shopping space slowed down noticeably after earlier surges.

In the financial market, the local stock market was on an upward trend during most of 2006, benefiting much from being a platform for overseas investors investing in the fast-growing Mainland market as well as for Mainland enterprises to raise capital around the world. Activities involving Initial Public Offerings (IPOs), including the listing of several prominent Mainland enterprises, attracted much interest. In terms of funds raised through IPOs, Hong Kong ranked second in the world in 2006, just after London. The Hang Seng Index broke the 20 000 mark for the first time in late December 2006 before closing the year at 19 965, 34 per cent higher than at the end of 2005. The average daily turnover rose to $33.9 billion establishing another record year. With the stock market capitalisation surpassing $13 trillion at the end of December 2006, Hong Kong's stock market overtook Toronto's to become the sixth largest in the world.

Consumer price inflation, although inching up in the first three quarters of 2006, remained moderate through to the end of 2006. The strong economic upturn, coupled with the low inflation rate, provided a highly supportive marcroeconomic environment for Hong Kong. On a year-on-year basis, the increase in the Composite Consumer Price Index inched up from 1.6 per cent in the first quarter to 2.0 per cent and 2.3 per cent respectively in the second and third quarters, before edging down to 2.1 per cent in the fourth quarter following a fall in oil prices and a steadier increase in housing cost.

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