Hong Kong's Gross Domestic Product (GDP) expanded by a robust 8.1 per cent in real terms in 2004, distinctly faster than the 3.1 per cent rate in 2003. The performance was the second best since 1987, just after the exceptionally high growth in 2000. On a year-on-year comparison, after increasing by 7.3 per cent in the first quarter of 2004, GDP surged further by 12 per cent in the second quarter against a low base in 2003 due to SARS, and sustained notable growth at 6.6 per cent and 7.1 per cent in the third and fourth quarters. On a seasonally adjusted quarter-to-quarter comparison, GDP expanded throughout the four quarters, by 2.4 per cent, 1.9 per cent, 1.7 per cent and 0.6 per cent respectively in real terms. This once again demonstrated the resilience and strength of our economy.

In the external sector, merchandise exports sustained remarkable growth throughout 2004, boosted by sturdy demand in all major markets including East Asia, the European Union and the US, as well as buoyant external trade and robust domestic demand in the mainland of China (the Mainland). Apart from this, the increasing competitiveness of Mainland products in the world market, coupled with the weakness of the US dollar, rendered a further boost to Hong Kong's exports. On invisible trade, inbound tourism was vibrant. The tourism sector fully recovered from SARS and was back on a full upswing, with the number of incoming visitors hitting successive new monthly highs in the latter part of 2004. While extension of the Individual Visit Scheme boost in the number of Mainland visitors, the number of visitors from most other major sources also rose considerably. Offshore trade also thrived, underpinned strong trade flows in the region.

While external trade was buoyant throughout 2004, the domestic sector also picked up. Local consumer spending maintained notable growth throughout the year, as consumers willingness to spend was well underpinned by optimism over the economic outlook, improving labour market conditions, as well as the wealth effect stemming from the rebound in property prices. Investment demand strengthened as investor confidence returned. The activity upturn and brighter business outlook prompted a broad-based increase in machinery and equipment investment by growing businesses. building and construction output remained in a lull, however, due to the earlier fall-off in new private building projects, and less building in the public sector.

The labour market improved progressively on a broad front throughout 2004. As the economic recovery gathered pace, total employment expanded notably. Vacancies rose across many sectors, with particularly distinct rises in trade-related and tourism-related sectors such as freight transport services, retailing, and restaurants and hotels. Reflecting improved employment conditions, the seasonally adjusted unemployment rate fell successively from a high of 8.6 per cent in the second quarter of 2003 to a near three-year low of 6.5 per cent in the fourth quarter of 2004. The underemployment rate also fell from a high of 4.3 per cent in the second quarter of 2003 to 3.1 per cent in the fourth quarter of 2004. Downward pressures on wages and labour earnings, which were still pronounced in 2003, began to recede gradually in 2004. The fall in labour earnings narrowed from 1.0 per cent in nominal terms in the fourth quarter of 2003 to 0.6 per cent in the fourth quarter of 2004.

The property market as a whole rebounded further during 2004, following a sharp turnaround in the latter part of 2003. Overall market sentiment was underpinned by the sustained improvement in local economic fundamentals, the end of the deflation era, and the prevailing low interest rate environment. More specifically for residential property, market confidence was also boosted by favourable land auction results, removal of the security of tenure provisions for domestic tenancies, and expansion of the Mortgage Insurance Programme. Flat prices staged a remarkable upturn over the course of the year. Flat rentals also rose, albeit to a lesser extent. Prices for office space picked up sharply as a sanguine business outlook stimulated acquisition interest, while rentals for office space rose steadily along with the general upturn in economic activities. As to shopping space, both prices and rentals moved up appreciably, supported by vigorous retail business amid continued revival in local consumer spending and vibrant inbound tourism. Prices and rentals of industrial property likewise resumed increases as end-user demand strengthened amid buoyant export growth and improved investor sentiment after the implementation of CEPA.

The economy finally came out of deflation that has lasted 68 months. As the pricing power of retailers returned along with the economic recovery, the rise in import prices stemming from a weak dollar and firming world commodity prices was more readily passed through to the retail price level. Prices of a wide range of consumer goods and services thus resumed increases after the first quarter of 2004. But the pace of upturn in consumer prices was only gradual, being kept down by modest housing costs due to an earlier fall-off in flat rentals. On a year-on-year basis, the decline in the Composite Consumer Price Index tapered distinctly from 1.8 per cent in the first quarter to 0.9 per cent in the second quarter, and then reverted to a small increase of 0.8 per cent in the third quarter and 0.2 per cent in the fourth quarter. In general, price pressures on the consumption front were modest all through the second half of 2004, as wages and earnings were still subdued in overall terms, while the rebound in property rentals over the previous year had yet to show up fully.

As to the GDP deflator, the year-on-year rate of decline also tapered, from 4.0 per cent in the first quarter to 2.8 per cent, 2.6 per cent and 2.1 per cent in the ensuing three quarters, along with the rebound in consumer prices and a pick-up in the price deflator for investment, the latter reflecting the distinct rise-back in the price deflator for construction investment and firmer prices of machinery and equipment investment. The pace of upturn in the GDP deflator was considerably slower than that of Composite CPI, due to the drag from a worsened terms of trade caused by the further weakening of the US dollar in the year.