HK economy shrinks on declining exports

Hong Kong's economy has shrunk for the first time in five years as the city falls victim to slowing exports and weaker domestic demand.

The contraction follows negative growth data this week from Japan and Singapore, underlining how Asia's export-driven economies are affected by the US slowdown.

Hong Kong's gross domestic product decreased by a seasonally adjusted 1.4 per cent between April and June compared with the previous quarter, according to government data yesterday.

On a year-on-year basis, however, the economy grew 4.2 per cent in the second quarter. This was below a forecast 5.6 per cent and compared unfavourably with 7.3 per cent growth in the first quarter.

Hong Kong, which relies heavily on financial services and exports, was hurt by slowing US and European demand for goods and turbulent global financial markets.

Sherman Chan, an economist at Moody's, said the latest figures were disappointing. "Growth momentum had shown few signs of easing, so the quarter-on-quarter contraction came as a complete shock," she said.

K.C. Kwok, a government economist, said the economy was still expected to grow between 4 and 5 per cent this year, but warned: "The external environment facing Hong Kong will become increasingly challenging . . . the macroeconomic adjustment measures in the mainland [China] economy also need to be watched closely."

Domestic spending, which had supported economic growth in earlier quarters, also decelerated, Mr Kwok said. "The stock market correction, rising inflation and dimmer global economic prospects probably dented consumer sentiments."

Li Kui-wai, an economics professor at City University of Hong Kong, expressed concern that a further weakening of the US dollar against the Chinese currency would exacerbate pressure on Hong Kong's exports, closely tied to factories on mainland China. "If the economic development of mainland China slows down, Hong Kong's economy will also be hurt," Mr Li said.

Inflation, a growing concern for Hong Kong, continued to rise despite the economy's contraction.

Second-quarter consumer price inflation rose to 5.7 per cent and Mr Kwok said inflationary pressures would continue to be felt in the second half of the year. "Global food prices and international oil prices, while showing some signs of stabilisation lately, remain elevated," he said.