Hong Kong 2006
Chapter 3:
The Economy
Structure and Development of the Economy
The Economy in 2006
Public Finance
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The Economy in 2006

External trade

Merchandise exports achieved another year of strong growth in 2006. Total exports of goods, comprising re-exports and domestic exports, grew 10.2 per cent in real terms in 2006, after an 11.4 per cent rise in 2005. After kicking off with a rapid growth in the first quarter of 2006, growth slowed slightly in the second quarter, before picking up again in the third and fourth quarters. Notwithstanding the uncertainties at the beginning of 2006, the global economic environment was largely supportive during the year. A number of favourable factors also set in particularly during the second half of the year. These included a notable fall-back in oil prices, improved competitiveness as a result of a weakened US dollar, and a strengthening of intra-regional trade. Adding to this, was the ongoing strong support from the robust Mainland economy and its vibrant trade flows.

Within the sphere of exports, re-exports continued to be the growth driver, rising by 10.8 per cent in real terms in 2006, following an 11.6 per cent growth in 2005, which marked the fifth consecutive year of double-digit growth. Nevertheless, re-exports slowed in the second quarter after their strong first quarter start, but picked up in the second half of the year on the back of the strengthening intra-regional trade and the further weakening of the US dollar. Domestic exports accounted for only 5 per cent of total exports in 2006. Reflecting the volatilities during 2006, domestic exports were lifted by a strong surge in textile and clothing exports in the first half of the year but which then reverted to a decline mode in the second half as the high base set in. For 2006 as a whole, domestic exports moderated to a 1.1 per cent growth in real terms, after a 7.6 per cent growth in 2005. The year 2006 was the third consecutive year in which domestic exports registered positive growth (Chart 7).

Chart 7
Hong Kong's visible trade
(year-on-year rate of change in real terms)
Chart 7 Hong Kong's visible trade (year-on-year rate of change in real terms)
Merchandise exports attained another year of double-digit growth in 2006, the fourth year in a row.

The Mainland continues to be a most attractive market for Hong Kong whose exports to that market picked up further in 2006 after very robust growth in 2005. This bright situation owes much to the Mainland's vibrant trade flows, including strong imports spurred by its buoyant domestic demand. Renminbi's appreciation during the year also helped increase imports into the Mainland. As a result, Hong Kong's shipment of goods to the Mainland for processing for re-export and for consumption continued to show robust growth.

Hong Kong's exports to countries in Asia continued to grow in 2006. This was due partly to their economies performing generally well, aided by flourishing intra-regional trade and the strengthening of many Asian currencies during the year. In contrast, the slowdown in exports to Japan since the fourth quarter of 2005 continued into 2006, due mainly to the weak yen.

However, Hong Kong's exports to its conventional markets in Europe and the US fared less well. Notwithstanding the economic upturn in EU in 2006, exports to this market slowed rather significantly during the year, mainly because of its moderating import demand and the lagged effect of a weaker euro in late 2005 and early 2006, and also because of the high base effect of the surge in textile and clothing exports to these markets in the first three quarters of 2005. Exports to the US market registered only a small increase in 2006, likewise affected by the textiles and clothing export surge of 2005. The increasing trend for Mainland products to be shipped directly from Mainland ports to overseas markets was probably another contributing factor.

Imports racked up a 10.2 per cent growth in real terms in 2006, from an 8.5 per cent increase in 2005. Import of goods intended for re-export maintained strong growth during 2006 in tandem with the robust re-export growth. The further pick-up in domestic demand also saw retained imports record a notable 8.4 per cent growth in real terms in 2006, after a meagre 0.8 per cent rise in 2005. Retained imports of capital goods surged throughout 2006, boosted by strong acquisition of telecommunications and office equipment. Retained imports of consumer goods, after a modest decline in 2005, also revived strongly in 2006, buoyed by bullish economic conditions which in turn boosted consumer spending. But retained imports of raw materials and semi-manufactures fell further.

With the increase in the value of imports of goods exceeding that of exports, the visible trade deficit calculated on a GDP basis has grown in absolute terms from $59.3 billion or 2.6 per cent in 2005 to $109.0 billion or 4.2 per cent of the value of imports of goods in 2006.

Exports of services, which were on a sustained robust uptrend over the past several years, grew further by 8.9 per cent in real terms in 2006. Exports of trade-related services, comprising mainly offshore trade, surged at double-digit rate, underpinned by the Mainland's vibrant trade flows. The buoyant financial markets, boosted particularly by the growing number of IPOs and other fund-raising activities during the year, also saw double-digit growth in exports of financial services in 2006. Exports of travel services slowed quite noticeably in the latter part of the year because of a fall in the number of visitors to Hong Kong, but overall they were able to maintain growth throughout the year.

Imports of services grew by 6.4 per cent in real terms in 2006, after a 7.4 per cent growth in 2005. Imports of financial, business and other services showed double-digit growth in 2006, while imports of transportation services recorded solid growth during the year. Imports of travel services reverted to a mild increase in 2006, while growth in imports of trade-related services was moderate throughout the year (Chart 8).

Chart 8
Hong Kong's invisible trade
(year-on-year rate of change in real terms)
Chart 8 Hong Kong's invisible trade (year-on-year rate of change in real terms)
Exports of services sustained brisk growth in 2006, with double-digit growth recorded for exports of trade-related services and exports of financial services.

Boosted by the surge in exports of services, the combined visible and invisible trade balance continued to record sizable surplus of $172.1 billion in 2006, equivalent to 6.0 per cent of the total value of imports of goods and services, compared to $172.2 billion and 6.7 per cent in 2005. The sizeable surplus underscored the Hong Kong's strong external competitiveness on the one hand, and the city's increased resilience to volatilities and external shocks on the other.

Domestic demand

Compared to trade, business on the domestic front was steadier, but an equally important contributor to Hong Kong's economic growth in 2006. Local consumption showed solid growth throughout the year, the labour market continued to perk up on a broad front, and the asset markets performed. Together, these factors presented a bullish economic picture. Reduced uncertainty over interest rates in the latter part of the year also boosted consumer confidence. Private consumption expenditure grew by 5.2 per cent in real terms in 2006, a remarkable jump from the 3.3 per cent of the previous year.

Overall investment grew for the fourth year in a row, highlighted by a 7.9 per cent growth in 2006, the fastest in six years. This was due mainly to a sustained surge in machinery and equipment acquisition, a clear reflection of investor confidence in the economy. However, the construction industry as a whole was lacklustre. After a short-lived rebound in the second quarter, private sector building and construction activity slowed again and recorded a moderate decline in the latter half of the year. Public sector building and construction activity was also slack, due to a fall-off in public housing works and a lack of large-scale infrastructure projects (Chart 9).

Chart 9
Main components of domestic demand
(year-on-year rate of change in real terms)
Chart 9 Main components of domestic demand (year-on-year rate of change in real terms)
Domestic demand played an increasingly vital role as both consumer and investor confidence held up well on the back of improving fundamentals.

The Labour Market

The labour market improved on a broad front for the third consecutive year in 2006, on the back of sustained strong economic growth. The growth pattern was broadly similar to that of the preceding two years, which was characterised by a strong expansion in total employment, a notable decline in unemployment and a slight rise in labour earnings. The job market continued improving throughout 2006, reaching an all-time-high figure of 3.47 million people with jobs in the fourth quarter. The seasonally adjusted unemployment rate fell to a near six-year low of 4.4 per cent by the end of the year, while the number of unemployed people slipped to 153 700. At the same time, the underemployment rate also fell, to 2.4 per cent (Chart 10).

Chart 10
Unemployment and underemployment rates
Chart 10 Unemployment and underemployment rates
Both the unemployment and underemployment rates fell during 2006, amid the sustained pickup in overall economic activity.

Employment in 2006 grew by 2.1 per cent, outpacing a 1.3 per cent increase in labour supply. In absolute terms, total employment was up by 70 800, broadly comparable to the average growth during the economic upturn in the early 1990s. Figures at the end of 2006 showed that an additional 299 000 jobs had been created since the employment slump in mid-2003, much exceeding the growth of 145 900 in the labour force (Chart 11).

While additional jobs were offered almost across-the-board, there were clearly more employment gains for managers and administrators, service workers, shop salespersons, workers in elementary occupations, those persons engaged in the wholesale, retail and import/export trades, restaurants and hotels, as well as people with upper secondary or above education.

Chart 11
Total labour force and total employment
(year-on-year rate of change)
Chart 11 Total labour force and total employment (year-on-year rate of change)
Employment growth continued to outstrip the labour force growth throughout 2006.

By comparison, job vacancies in the private sector rose by 5.7 per cent in December 2006 over the same period in 2005. Although the growth was slower than that seen in the preceding two years, this was partly due to the increased take-up of jobs during 2006. When job vacancies are matched against the unemployment figures, the overall ratio showed an increase to 25 job openings for every 100 job seekers in December 2006, from around 20 a year earlier. While the ratio for lower-skilled jobs rose from 16 to 20, that for higher-skilled jobs went up from 54 to 73. There are currently more openings for higher-skilled workers, as reflected in the 7.0 per cent increase in vacancies in the higher-skilled sector and the 4.8 per cent fall in the lower-skilled field. In addition, figures showed a significant proportion of the vacancies occurring in 2006 was for jobs in the services sector, especially the import and export trades, restaurants, business services and financing.

Notwithstanding a greater demand for workers, wage increases remained moderate. Labour earnings in the private sector rose by 2.4 per cent in money terms or 0.4 per cent in real terms in 2006 compared to a year earlier. This modest overall movement however concealed fairly wide variations among different economic sectors and occupations. For instance, pay rises in the finance, insurance, real estate and business services sectors were relatively higher with employees in these fields receiving average pay rises of 5.6 per cent in money terms, compared with the increases for workers in the restaurant and hotels, transport, storage and communications, and manufacturing sectors which were 2.6, 2.1 and 1.4 per cent respectively (Chart 12).

Chart 12
Labour earnings
Chart 12 Labour earnings
Labour earnings continued to increase moderately in money terms during 2006.

The Property Market

The home sales market went through a healthy consolidation in 2006, adjusting further to the hectic situation which prevailed from mid-2003 to mid-2005. Flat prices moved within a narrow margin in 2006, as prospective buyers became more prudent after the earlier price surge. The uncertain interest rate outlook was also a restraining factor, which diminished following the pause in US interest rate rises since August. Nevertheless, market sentiment remained generally positive, as the longer-term outlook was well underpinned by the sanguine economic outlook and the improving employment situation. In December 2006, flat prices edged up by 4 per cent over a year earlier. Compared with the trough in 2003, flat prices in December 2006 were 61 per cent higher, but still 46 per cent off the peak in 1997. As regards leasing, flat rentals increased further during 2006, albeit at a steadier pace of 6 per cent. The leasing performance was supported by the progressive improvement in user demand alongside the economic upturn (Chart 13).

Chart 13
Prices and rentals of residential property
Chart 13 Labour earnings
Flat prices continued to move within a narrow band during 2006, sustaining the consolidation after the earlier hectic situation which lasted until mid- 2005. However, sentiment about the longer-term market outlook stayed positive. Flat rentals moved up steadily in the wake of solid user demand.

The non-residential property market fared rather well in 2006, with the office segment performing strongly. Rents in this segment rose by 14 per cent in December 2006 compared with a year earlier. Concurrently, rents of Grade A office space in core districts went up more by 19 per cent. The sharper increase was supported partly by the growing volume of high value-added activities in the economy, particularly in the financial and professional services. Also relevant was the low vacancy and limited new office supply in core districts in the near future. On the sales front, activity levelled off after the earlier busy spell. Increases in overall office space prices and prices of Grade A office space in core districts steadied at 4 per cent and 3 per cent respectively during 2006 (Chart 14).

As for other non-residential properties, the demand for shopping space was bullish but increases in rents and sale prices narrowed further to 4 per cent and 3 per cent respectively in December 2006 compared with a year earlier. The increases during 2006 occurred mainly in the latter part of the year as sentiment turned more positive against the backdrop of sustained strength in retail sales. In respect of industrial property, rents and prices of flatted factory space surged by 11 per cent and 24 per cent respectively during 2006. The user demand for flatted factory space from the manufacturing and trading sectors stayed strong, while the attractive rental yield and the potential for converting factory space into commercial space continued to appeal to investors.

Chart 14
Prices and rentals of office space
Chart 14 Prices and rentals of office space
Office rentals surged further during 2006, alongside the general trend of business expansion. But the increase in office prices slowed visibly as investors became more prudent after the earlier buoyancy.

As for supply of new properties, completions of new private residential flats fell slightly by 4 per cent to 16 600 units in 2006. Taking into account the number of unsold units in completed projects and in to-be-completed projects, it is estimated that the potential supply of new private residential flats will be in the region of 69 000 flats in the next three to four years. This is more than three times the average number of primary flats sold during 2002-06. Compared with end-2005, the vacancy rate of private residential property slipped to 5.9 per cent in 2006.

Regarding non-residential properties, completions in terms of internal floor area surged by 97 per cent to 318 400 square metres in 2006, with the increase concentrated in office and retail spaces. Yet as demand increased notably, the vacancy rate fell across-the-board to 7.7 per cent for office space, 9.8 per cent for retail space, 7.2 per cent for flatted factory space and 6.9 per cent for industrial-cum-office space.

The number of property transactions, in terms of agreements for sale and purchase of property registered with the Land Registry, declined by 20 per cent both in volume and value in 2006. Transactions in residential property fell by 20 per cent in volume and 26 per cent in value. The decrease occurred mainly in the first half of 2006 while the second half witnessed a modest rebound as sentiment improved as a result of the pause in US interest rate increases which had been occurring since August. As regards non-residential property, transactions fell markedly by 18 per cent in 2006. But there was a marginal rise of one per cent in value, mainly due to certain big-ticket transactions for office and industrial properties during the year (Chart 15).

Chart 15
Sale and purchase agreements by
broad type of property
Chart 15 Sale and purchase agreements by broad type of property
Despite a modest rebound during the second half, overall property sales slowed in 2006 as a whole, indicating further market consolidation after the earlier hectic situation.

Price Movements

Consumer price inflation, though inching up during 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. The rapid increase in business investment over the past year or so had contributed to notable productive improvement and capacity expansion, which in turn helped to contain inflationary pressures. The steadier increase in housing rents over the course of the year also helped. Externally, the substantial easing in oil prices in the latter part of 2006 offset to some extent the mild impacts of the weakening of the Hong Kong dollar alongside the US dollar and the modest appreciation of renminbi on import prices. In overall terms, import prices picked up slightly towards the end of the year. 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 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 the easing of oil prices and a steadier increase in housing cost.

The GDP deflator, recorded a further slight decline of 0.4 per cent in 2006. While export prices could rise only moderately because of the need to stay competitive, import prices rose because of the rise in oil prices which later eased but there was still a knock on effect from a weaker US dollar and the appreciation of renminbi in the latter part of the year. Excluding the effect of the terms of trade, the domestic demand deflator actually rose by 1.8 per cent in 2006, largely in sync with consumer price inflation.

Chart 16
Main inflation indicators
(year-on-year rate of change)
Chart 16 Main inflation indicators (year-on-year rate of change)
Consumer price inflation remained benign throughout 2006.
2005 I 2004 I 2003 I 2002 I 2001 I 2000 I 1999 I 1998 I 1997