Domestic Demand

Retail business was underpinned by a strong local consumer sentiment for
most of the year, but offset to a considerable extent by the setback in
inbound tourism. After late October, local consumer sentiment was also
dampened by the marked correction in the stock and property markets
and the rise in interest rates. The volume of retail sales, year-on-year, fell
by 4.8 per cent in the fourth quarter, in contrast to an average increase of
3.1 per cent in the first three quarters. For 1997 as a whole, retail sales
rose by only 1.1 per cent in volume, down from a 1.6 per cent increase in
1996. Of the total retail business, sales of motor vehicles rose most
rapidly, by 26 per cent in volume in 1997. This was followed by sales of
jewellery and watches and of other consumer durables, by 6 per cent and
5 per cent respectively. However, spending on these high-value items
shrank sharply towards the end of the year. Growth in private
consumption expenditure averaged 7 per cent in real terms in 1997,
compared with a 5 per cent rise in 1996.

Gross domestic fixed capital formation, as an overall measure of
investment demand, grew strongly by 13 per cent in 1997. This was even
faster than the 12 per cent increase in 1996. Among the major
components, investment spending on machinery equipment surged ahead,
along with continued mechanisation and office automation in the
economy, and the substantial intake of equipment for the new airport and
the airport railway. Overall building and construction expenditure
registered further growth, notwithstanding the gradual completion of
projects under the Airport Core Programme, as there was a marked
pick-up in building activity at private-sector sites. However, in parallel
with the consolidation in the property market, private-sector building
activity slackened towards the end of the year.

Chart 8 Main components of domestic demand (year-on-year-growth
rate in real terms) In 1997, domestic demand was underpinned by
continued strong growth in investment demand and a steady pick-up in
consumer demand.

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