Abstract
This 2004 Article IV Consultation highlights that after a period of prolonged weakness in economic activity, persistent deflation and rising fiscal deficits, the macroeconomic outlook for Hong Kong Special Administrative Region has improved significantly since mid-2003. The recovery has gained significant momentum and become broad-based in 2004. The consolidated fiscal deficit for FY2004/05 is now projected at about 1¾ percent of GDP, compared with the budget target of about 5 percent of GDP. The improvement relative to the budget is on account of buoyant revenue performance and continued expenditure restraint.
1. This statement contains information that has become available since the staff report was circulated to the Executive Board on January 4, 2005. This information does not alter the thrust of the staff appraisal.
2. Some indicators of economic activity point to a moderation of economic growth in the fourth quarter of 2004, but it is difficult to draw firm conclusions prior to the release of GDP data. 1 The slowdown in retail sales growth, from an average of about 10 percent (year-on-year) during January-October 2004 to 6¾percent (year-on-year) in November, may be attributable to the decline in spending by tourists from the Mainland. External trade has also weakened—export growth slowed to about 13 percent (year-on-year) in December from 17 percent (year-on-year) in November. The consumer price index rose by 0.2 percent (year-on-year) in December 2004 (the same rate of increase as in November). The unemployment rate fell to 6.5 percent in December 2004 (from 6.7 percent in November).
3. The overall fiscal position continues to improve significantly. Following a good performance in the fourth quarter, investment income from the fiscal reserves in 2004 was HK$14.5 billion, HK$2.2 billion higher than projected in the FY2004/05 budget. As of end-December 2004, fiscal reserves stood at about HK$273 billion (about 21 percent of GDP; up from HK$253 billion at end-September), sufficient to cover about 13 months of government expenditures.
4. Significant strong-side pressures on the Hong Kong dollar have persisted, although the discount in the one-year forward rate has eased in January 2005. The forward discount—which implies expectations of an appreciation—has declined to about 1½percent (compared to a record 2 percent in November 2004).
GDP data for the fourth quarter will be released in March 2005.