1. Update on the Hong Kong Economy for
The Task Force on Economic Challenges
Government Economist
8 December 2008

2. Global/local developments since last meeting
Global financial market strains eased somewhat; risks of meltdown receded for the time being
Local interest rates also down
But global credit market still not functioning...

3. Concern about global financial meltdown eased, but credit markets still tight

4. Local interbank rates down… but banks still cautious in lending

5. Global synchronised downturn increasingly apparent…

6. … leading to a further mark-down in global economic growth forecasts

7. US economy in a dire state

8. Likewise for EU and Japan

9. Asia also feeling the pinch

10. HK economy also hard hit…

11. GDP growth slowed markedly in Q3 2008

12. Impact on the four harder-hit sectors

13. Financial services

14. Banking sector under pressure in a number of ways:
Income : Contraction in loan balance; Non-interest income withering amid falling demand for investment products
Loss provisions and charge-offs : Provision for losses on investments; Non-performing loan; Falling property prices leading to more negative equity cases
Operational pressure : Liquidity / capital demand from foreign / Mainland branches; Lehman-related issue; Structural changes leading to higher compliance and operating costs

15. Financial sector activities already slowing markedly since early 2008

16. Partly due to sharp declines in IPO activity and stock market turnover ……

17. …… but loans also began to fall

18. Financial services sector: unemployment/vacancy*
* Private sector vacancies posted by the Labour Department.

19. Trading and logistics

20. Export outlook is grim 2003 SARS Current global crisis
2001 global downturn
1998 AFC

21. Trading and logistics: unemployment/vacancy*
* Private sector vacancies posted by the Labour Department.

22. Tourism and consumption-related sector

23. Tourist number remains on a decline; Retail sales down in October
1998 AFC
Current global crisis
2001 global downturn
Current global crisis
2003 SARS
2001 global downturn
2003 SARS
1998 AFC

24. Tourism and consumption-related sector: unemployment/vacancy*
* Private sector vacancies posted by the Labour Department.

25. Real estate and construction sector

26. Property market down further; Transactions fell back to 2003 average
1998 AFC
2001 global downturn
Current global crisis
2003 SARS

27. Construction sector output remains on a downtrend
2001 global downturn
2003 SARS
1998 AFC
Current global crisis

28. Real estate and construction sector: unemployment/vacancy*
* Private sector vacancies posted by the Labour Department.

29. Feedback from SMEs

30. Impact on business receipts
SMEs by sectors
% decline as compared to normal situation for
week ending 28 Nov
Expected further % decline in
one month's time
Wholesale trade
-24.7
-13.8
Retail trade
-24.9
-10.5
Import/export trades
-17.9
-12.5
Restaurants
-13.9
-8.3
Transport services
-29.7
Travel agents
-15.2
-17.7
Financing institutions
-23.3
-6.9
Insurance agents and brokers
-9.2
-9.4
Construction and related activities
-32.8
-8.5
Business services
-10.6
-9.5
All the above sectors
-18.7
-12.2

31. % decline as compared to
Impact on employment
SMEs by sectors
% decline as compared to
normal situation for
week ending 28 Nov
Expected further %
decline in
one month's time
Wholesale trade
Retail trade
-0.6
-0.7
Import/export trades
-2.3
-0.9
Restaurants
-2.8
-0.2
Transport services
-5.8
-1.7
Travel agents
-0.5
-1.1
Financing institutions
-1.3
Insurance agents and brokers
Construction and related activities
-7.6
-3.6
Business services
-4.5
All the above sectors
-2.5
-0.8

32. Impact on access to credit
SMEs by sectors
Tighter than normal for
week ending 28 Nov
Expected further
tightening in
one month's time
(% of SMEs)
Wholesale trade
12.0
Retail trade
10.0
7.5
Import/export trades
17.1
16.2
Restaurants
19.0
12.1
Transport services
8.3
Travel agents
3.3
Financing institutions
12.5
Insurance agents and brokers
15.0
Construction and related activities
11.4
5.7
Business services
All the above sectors
10.7

33. Outlook for HK

34. Latest 2009 forecasts vary widely
Standard Chartered:
2.3%
Fitch:
-1.2%
IMF: 2%
Morgan Stanley:
HSBC: 1%
JP Morgan:
-1.3%
S&P: %
Credit Suisse:
-2.2%
Bank of China:
0.5%
Citigroup:
0.3%
Hang Seng Bank: 0%

35. Our latest assessment
Global economy in a dire state; timing of recovery still highly uncertain
HK’s GDP growth likely to turn negative in 2008 Q4 and 2009 H1
Recession in 2009 seems inevitable given the recession in advanced economies and ensuing drag on Asia
China still a positive factor for HK, esp with series of measures to boost domestic demand and forestall severe export slowdown

36. Measures to mitigate the impact :
Ensure banking sector liquidity and monetary stability
SME loan guarantee schemes
Job creation initiatives
Increase minor construction projects and speed up infrastructure projects where possible
CPG’s support for HKSARG

37. End