1. 1 Update on the Hong Kong Economy for The Task Force on Economic Challenges Government Economist 22 June 2009

2. 2 Global recession deepened more than expected Q1, but signs of stabilisation emerging

3. 3 External environment worsened more than expected in the first few months Consensus forecast by private sector analysts (Real GDP growth in 2009) Jan 2009 Feb 2009 Mar 2009 Apr 2009 May 2009 Jun 2009 World-0.2-0.8-1.6-2.1-2.3-2.6 US-1.8-2.1-2.8-2.7-2.9-2.8 Euro area-1.4-2.0-2.6-3.4-3.7-4.2 Japan-1.7-3.8-5.8-6.3-6.1-6.6 China7.47.0 7.5

4. 4 US economy showing signs of stabilisation …

5. 5 … but a sustained recovery not yet in sight

6. 6 Economic sentiments in EU and Japan improved, but activity still lacklustre

7. 7 China’s economic situation turned better

8. 8 HK economy heavily hit by collapse in world trade in Q1…

9. 9 GDP plunged by 7.8% in 2009 Q1, amid the fall-off in external demand

10. 10 Exports plunged but orders improving

11. 11 Retail sales showing a relative improvement

12. 12 Results of Business Tendency Survey, as a leading indicator, improved

13. 13 Results of latest Business Tendency Survey (Large firms) Source : Quarterly Business Tendency Survey, C&SD. Views on expected changes in business situation in the following quarter (Net balance) 20082009 Q3 over Q2Q4 over Q3Q1 over Q4Q2 over Q1 Manufacturing +24-24-50+7 Construction +15-15-67-51 Import/Export Trade and Wholesale +17-8-64-38 Retail +21-23-59-68 Accommodation and Food Services +8-30-78-73 Transportation, Storage and Courier Services +17-16-54-49 Information and Communications +38+7-15-24 Financing and Insurance +14-26-53-24 Real Estate +5+1-28 Professional and Business Services +16-18-42-40 All Sectors Above +17-15-53-36

14. 14 Unemployment rate stabilised for the first time after rising for eight consecutive months Seasonally adjusted unemployment rate (%) m-t-m change (% point) Jun-Aug 20083.20.0 Jul-Sep 20083.4+0.2 Aug-Oct 20083.5+0.1 Sep-Nov 20083.8+0.3 Oct-Dec 20084.1+0.3 Nov 2008-Jan 20094.6+0.5 Dec 2008-Feb 20095.0+0.4 Jan-Mar 20095.2+0.2 Feb-Apr 20095.3+0.1 Mar-May 20095.30.0

15. 15 Total employment number also registered its first increase Monthly average # (number) 20082009 DecJan & FebMarAprMay Trading and logistics4 400-2 100-12 300-9 000-18 400 Trading (1) 4 1002 350-11 800-8 700-15 200 Logistics (2) 300-4 450-600-300-3 300 Financial service-2 900-2 2002003 1009 200 Financing-2 300-1 2503001 9006 600 Insurance-600200-1001 2002 600 Tourism and consumption-related services6 600-4 250-6 6005003 100 Retail7 700-1 000-6 300-1 6003 200 Food services-500-3 600-7001 000-1 000 Accommodation services-6003005001 200800 Real estate and construction4 600-5 700900-11 1002 300 Real estate1 700-2 6504 500-3 4001 700 Construction2 800-3 100-3 600-7 800700 Overall11 200-15 600-5 500 12 800 Notes:(1)The trading sector includes import/export trades and wholesale trade. (2)The logistics sector includes freight transport, storage, postal and courier services. (#)Difference in employment in the 3-month ending the reference month as compared to the 3-month ending the month before.

16. 16 Loan demand remains weak but credit access improves

17. 17 How does HK fare relative to other advanced Asian economies?

18. 18 Many other Asian economies saw even larger declines in GDP Year-on-year growth rate of real GDP (%) 20082009 AnnualQ1Q2Q3Q4Q1 Hong Kong2.47.34.11.5-2.6-7.8 Singapore1.16.72.50.0-4.2-10.1 Korea2.25.54.33.1-3.4-4.2 Taiwan0.16.24.6-8.6-10.2 Japan-0.71.30.6-0.3-4.3-8.8

19. 19 Export performance better than many in Asia Exports of selected East Asian economies (year-on-year growth rate in US$ terms) 20082009 Q3Q4Jan-FebMarAprMay Hong Kong 5.6-1.8-21.9-20.9-17.8N.A. China 23.04.2-21.2-17.2-22.6-26.4 Japan 12.9-9.9-38.5-43.9-36.8N.A. Singapore 21.2-13.9-35.0-28.2-32.9-30.6 Korea 27.0-9.9-26.7-22.1-19.7-28.5 Taiwan 8.0-24.7-37.2-35.8-34.3-31.4 Indonesia 27.9-5.6-33.7-28.3-22.6N.A. Malaysia 21.3-12.6-29.9-26.9-35.4N.A. Philippines 4.1-22.3-39.9-30.8-35.2N.A. Thailand 26.1-10.7-19.2-23.1-26.1N.A. East Asia 18.6-5.9-28.5-27.2-27.1N.A.

20. 20 How does the current crisis compare with the 1997-98 Asian Financial Crisis?

21. 21 World GDP has contracted much more severely during the current crisis

22. 22 Asian exports more hard hit during the current crisis

23. 23 Hence the fall in Hong Kong’s exports was also severe this time

24. 24 Stock market plunged during both crises

25. 25 But housing market fared much better this time

26. 26 Interest rates are very accommodative this time

27. 27 Labour market more resilient with less job loss

28. 28 Effectiveness of Government’s relief measures

29. 29 Several rounds of relief measures have rendered some support to the economy Discretionary relief measures announced since last year amounted to some $87.6 billion, or 5.2% of GDP. These measures taken together would raise GDP by about 2 percentage points this year alone Some 8 600 firms benefitted from the Loan Guarantee Schemes, involving loan amount of over $22.7bn, and helping to secure the jobs of around 160 000 people Consumer sentiment held relatively firm and cumulative job loss much less than during AFC Important to adhere to fiscal prudence and return to balanced budget over the medium term

30. 30 2009 Updated forecasts

31. 31 Contraction in the first quarter bigger than expected Significant mark-down in world GDP forecast since Feb 2009 External sector in near term still under the severe drag of plunging global trade flow, yet with prospect of relative improvement later this year GDP forecast for 2009 marked down: -5.5% to -6.5%

32. 32 Risk of global financial market showing renewed volatility; credit markets still not functioning properly Negative feedback between the financial markets and the real economy Uncertainties about impact of the human swine influenza Recovery path possibly still bumpy...

33. 33 Signs suggesting the pace of global economic contraction will slow in the coming quarters Weaker dollar will help exports Relative improvement in economic sentiment in US and Europe Mainland economy poised for a faster growth Low local interest rates Outlook for 2009: Positive factors

34. 34 Private sector analysts’ forecasts for Hong Kong in 2009 2nd meeting in Dec 2008 3rd meeting in Jan 2009 4th meeting in Apr 2009 Latest in Jun 2009 Bank of China0.5% -2%-4% Citigroup0.3% -2.2%-4.3% Credit Suisse-2.2% -4%-5.2% Deutsche BankN.A.-4% -5.0% GoldmanN.A.-3%-6%-4% HSBC1%-2%-4.5% Hang Seng Bank0%-3% -5% IMF2%N.A.-2%-4.5% JP Morgan-1.3% -3%-5.5% Morgan Stanley-1.2%-3.8% Standard Chartered2.3%-0.9%-1.8%-3.4% Consensus Forecast-0.3%-1.3%-3.5%-4.6%

35. 35 End