1 3 March Economic outlook Government Economist

2 Global setting

3 Global financial turmoil mutated into global synchronised downturn

4 Job losses posing a severe drag on US consumption

5 US imports falling even faster, which impact severely on Asia’s exports

6 EU’s demand cut back sharply amid recession mode

7 Similar situation in Japan

8 Exports in Asia all plunging

9 HK’s economic outlook in 2009 Global economy mired in recession; many Asian economies bound to be significantly hit HK economy expected to contract by 2 - 3%, under the drag from shrinking external demand and dented sentiment Timing of global recovery remains uncertain

10 Downside risks Deeper and more protracted global recession Negative feedback loop between economic downturn, credit crunch and financial market stress Concerns about the aftermaths of various aggressive policy measures Disorderly unwinding of the global trade imbalances Rising protectionism

11 HK’s sound fundamentals will help us withstand the crisis better than many others Banks prudent in lending: high CAR Spending within our means: current account surplus HK is a net creditor to rest of the world: strong IIP Fiscal prudence 3rd most competitive economy in the world

12 HK’s external positions are strong Note: End-2007 figures. Korea and India refer to September and March 2008 figures respectively. Net Total IIP (USD bn)(% of GDP) China1,02231 Hong Kong India-53-5 Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand-58-23

/10 Budget

14 Short term measures to tackle the global crisis 2009/10 Budget is a further package following a series of measures already implemented last year $57 bn total of measures (3.5% of GDP) 100% deposit guarantee $100 bn loan guarantee scheme for all enterprises except listed companies Efforts to create jobs announced earlier

15 Vulnerable groups prone to unemployment 2008 Nov Jan2009 Q1 Q2Q3Q4 Manufacturing Construction Services Wholesale and retail Import and export trades Restaurants and hotels Transport and storage Communications Financing and insurance Real estate and business services Overall

/10 Budget : focused efforts to help the most vulnerable Construction, esp decoration and maintenance Youth unemployment and new graduates Middle aged and disabled

17 In macro sense, 09/10 Budget is expansionary Spending increase: Recurrent spending : up $11.7 bn Capital works expenditure: up $16.3 bn Revenue concessions : $8.4 bn Budget deficit : $39.9 bn (2.4% of GDP)

18  Further integration with the vibrant Mainland economy and positioning ourselves strategically in the PRD  Move towards higher value-added and knowledge- based activities:  Strengthen HK as an international financial centre:  Green economy  Promote Innovation & Technology  Promote Creativity  Invest in infrastructure  Upgrade human capital Looking beyond the financial crisis

19 Upgrading human capital is key to future success

20 Managers, administrators and professionals % share to total employment* % % % *Excluding foreign domestic helpers. Hong Kong as a knowledge-based economy – proportion of managerial and professional staff in the workforce on the rise

21 Hong Kong’s productivity growth

22 3 March 2009 Thank you

23 Value added by major economic sectors H Q3 % %%% Services Wholesale and retail Import and export trades Restaurants and hotels Transport and storage Communications Financing and insurance Real estate and business services Community, social and personal services Year-on-year rate of increase in value added in real terms

Medium Range Forecast