Introduction

THE Hong Kong economy began the year on a strong note, with the Gross Domestic Product (GDP) increasing by 4.5 per cent in real terms in the first quarter over a year earlier. Growth in the second quarter was abruptly derailed by the spread of Severe Acute Respiratory Syndrome (SARS), with GDP relapsing to a 0.5 per cent decline. Nevertheless, economic activity soon staged a broad-based recovery in the third quarter after the waning of SARS, and the upswing was sustained well into the fourth quarter upon a further lift in local sentiment. Reflecting this, GDP bounced up strongly to 4.0 per cent and 5.0 per cent growth respectively in these two quarters. Thus, even with the severe setback caused by SARS earlier in the year, the Hong Kong economy still attained an appreciable growth of 3.3 per cent in real terms for 2003 as a whole, which compared favourably with that of 2.3 per cent in 2002. On a seasonally adjusted quarter-to-quarter comparison, GDP shrank by 0.5 per cent and 2.6 per cent respectively in real terms in the first and second quarters of 2003, but reverted to increases by 6.6 per cent in the third quarter and 1.5 per cent in the fourth quarter.

In the external sector, inbound tourism and the travel-related sectors suffered a drastic downturn in the second quarter of 2003 upon the impact of SARS, but regained strength swiftly in the third quarter and advanced further in the fourth quarter. The remarkable turnaround was backed by a strong rebound in visitor arrivals from the Mainland, especially after the launch of the Individual Visit Scheme in late July. As to merchandise exports and offshore trade, they both displayed highly robust growth throughout 2003, bolstered by continued strong expansion in the Mainland economy, a visible revival in the global economy, as well as a surge in intra-regional trade. Enhanced competitiveness of Hong Kong's exports, backed by a distinct weakening in the US dollar and further domestic cost adjustments, as well as deriving from increasing competitiveness of Mainland products in the world market, rendered an additional boost to the export growth.

In the domestic sector, consumer spending likewise underwent a severe setback in the second quarter of 2003, but was progressively resurrected in the third and fourth quarters. Consumer sentiment appeared especially upbeat towards the end of the year, boosted by the rally in the local stock market, a more active property market, and progressive improvement in the unemployment situation. Investment spending on machinery and equipment also turned up to a notable growth in the latter part of 2003, on the back of improved economic conditions and brighter business outlook, especially after the signing of the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Mainland. Yet building and construction output was weak throughout.

The labour market weakened substantially during the first half of 2003 upon the abrupt fall-off in economic activity caused by SARS, with labour demand shrinking most visibly in the consumption and tourism-related sectors. Then, as the economy revived, employment and vacancies showed renewed increases in the latter part of the year. The seasonally adjusted unemployment rate, having surged from 7.2 per cent in the fourth quarter of 2002 to a high of 8.7 per cent in May-July 2003, fell back appreciably to 7.3 per cent in the fourth quarter. The underemployment rate likewise surged, from 3.1 per cent in the fourth quarter of 2002 to a high of 4.3 per cent in the second quarter of 2003, as many employees in the SARS-affected sectors were temporarily suspended from work at that time. This was nevertheless followed by a notable decline to 3.3 per cent in the fourth quarter, as these employees gradually resumed work and as the overall work intensity rose again along with the recovery in economic activity. Labour earnings eased further by 1.8 per cent in money terms in the third quarter of 2003 over a year earlier.

The property market had clearly turned around in late 2003, after the languishing performance earlier in the year. On residential property, trading activity, having plunged in the second quarter, rebounded appreciably in the latter part of the year amidst growing optimism for the economy. Flat prices staged a distinct upturn in the fourth quarter, while flat rentals seemed to have bottomed out towards the year-end. On commercial property, the market for office space likewise picked up towards the end of the year, as manifested by a notable surge in the prices of office space and a narrowed decline in office rentals. As to the market for shopping space, the improvement in performance was even more distinct, with prices lifted visibly and rentals ceased declining. Regarding industrial property, while demand remained generally weak, keener interest came from certain end-users in converting some of the existing industrial sites into hotel use.

On consumer prices, the downtrend in the Composite Consumer Price Index (CPI) continued in 2003, as local prices were held down by the generally slack domestic demand and profit margin squeeze especially during the course of the SARS outbreak, as well as by the lower wages and rentals. The rates concession and waiver of water and sewage charges, as part of the Government's special relief measures, also dragged down the CPI for some months later in the year. Yet as the downward effect of these relief measures was lessened, and as price discounts and other concessions on many of the consumer items were reduced along with steadily improving demand, the year-on-year decline in the Composite CPI tapered visibly to 2.3 per cent in the fourth quarter of 2003, having widened from 2.0 per cent in the first quarter to 2.5 per cent and 3.6 per cent respectively in the second and third quarters. Also partly contributing were firmer prices of retained imports amidst a weaker US dollar and rising world commodity prices. For 2003 as a whole, the Composite CPI fell by 2.6 per cent, narrowed from the 3.0 per cent drop in 2002. The GDP deflator, as a broad measure of overall price change in the economy, however, exhibited a more pronounced decline by 5.1 per cent in 2003, as against a 3.0 per cent fall in 2002. This was due in large part to a worsening in the terms of trade, aside from downward price pressure in the domestic economy. Consequential to the enlarged decrease in the GDP deflator, nominal GDP had a larger fall in 2003 than in 2002, by 2.0 per cent as against 0.8 per cent.