2009 Economic outlook

Government Economist

3 March 2009

1

Global setting

2

Global financial turmoil mutated into global synchronised downturn

3

Job losses posing a severe drag on US consumption

16 Year-on-year growth rate (%) Year-on-year growth rate (%) 4 12 8 4 Retail Sales (LHS) 3 2 1 0 0 -4 Employment (RHS) -1 -8 Jan09 -2.5

-9.7

-2 -12 1/93 1/94 1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 -3 4

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

30 Year-on-year growth rate (%) 25 20 15 10 US's imports from Asia in nominal terms 5 0 -5 -10 -15 US's imports demand in real terms -20 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 5 Dec -9.8

-10.4

20 15 10 5 0 -5 -10 -15 -20 -25 -30 -35 -40

EU’s demand cut back sharply amid recession mode

Year-on-year growth rate (%) 35 Year-on-year growth rate (%) Quarter-to-quarter growth rate (%) 30 25 20 EU's GDP annualised q-t-q rate of change in real terms (RHS) 15 10 EU's Sentiment Index Feb09 -39.8% -45 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 5 0 -5 -10 -15 -20 -25 -30 -35 01 02 03 EU's import demand in real terms (LHS) 04 05 06 07 Dec08 -4.6% Q408 -5.8% 08 6 6 4 2 0 -2 -4 -6

Similar situation in Japan

50 40 30 20 10 0 -10 -20 Index

Japan GDP vs Tankan Survey

Japan GDP Real Growth (RHS) Q408 Tankan: -16 % 5 4 3 2 1 0 -1 -2 -30 Japan TANKAN Large enterpriese (LHS) -40 Q408 Real GDP Growth: -4.6% -50 95 96 97 98 99 00 01 02 03 04 05 06 07 08 -3 -4 -5 14

Japan Import Demand

Year-on-year growth rate in real terms (%) 12 10 8 2 0 6 4 -2 -4 -6 -8 -10 -12 -14 1/01 Jan09: -10% 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 7

Exports in Asia all plunging

GDP growth slowing Exports all down

15 Year-on-year growth rate (%) 10 5 0 -5 -10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 04 04 04 04 05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 China Korea Philippines Japan Taiwan Thailand Hong Kong Indonesia Singapore Malaysia 60 Year-on-year growth rate (%) 50 40 30 20 10 0 -10 -20 -30 -40 -50 01/ 04 07/ 04 01/ 05 China Korea Philippines 07/ 05 01/ 06 Japan Taiwan Thailand 07/ 06 01/ 07 07/ 07 Hong Kong Indonesia 01/ 08 07/ 08 Singapore Malaysia 01/ 09 8

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 9

• • • • •

Downside risks

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

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 11

HK’s external positions are strong

China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Net Total IIP (USD bn) 1,022 522 -53 -150 (% of GDP) 31 252 -5 -35 -155 -18 -27 223 467 -58 -16 -10 -19 138 122 -23 16 Percent 12 8 4 0 -4 Current account balance as % of GDP 13.1% Note: End-2007 figures. Korea and India refer to September and March 2008 figures respectively.

-8 1997 1999 2001 2003 2005 2007 2008 Q1-Q3 12

2009/10 Budget

13

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 14

Vulnerable groups prone to unemployment

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

Q1 3.9

7.5

2.6

3.8

2.4

5.2

3.3

3.5

1.3

2.5

3.4

Q2 4.1

7.6

2.4

4.2

2.4

4.6

2.7

3.3

1.7

2.2

2008 Q3 4.2

5.4

2.8

4.6

2.3

5.5

2.9

3.2

2.0

2.6

3.3

3.4

Q4 4.7

6.1

3.1

4.9

3.3

6.3

3.8

3.9

1.4

2.7

4.1

Nov200 8 Jan2009 5.4

7.2

3.6

5.2

3.9

6.6

4.6

4.6

2.0

3.4

4.6

15

2009/10 Budget : focused efforts to help the most vulnerable



Construction, esp decoration and maintenance



Youth unemployment and new graduates



Middle aged and disabled

16

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)

17

     

Looking beyond the financial crisis



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

18

Upgrading human capital is key to future success

(% share) 33 31.2% 31 29 27 25 23 Share of tertiary educational attainment in labour force 21 19 17 15 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 19

Hong Kong as a knowledge-based economy – proportion of managerial and professional staff in the workforce on the rise 1998 2003 2008 Managers, administrators and professionals 903 600 1 057 800 % share to total employment* 30% 35% 1 279 600 39%

* Excluding foreign domestic helpers.

20

Hong Kong’s productivity growth

2.5

2.0

1.5

1.0

0.5

0.0

4.0

Average annual rate of change (%) 3.5

3.0

1.2% 1997-2000 2.9% 3.7% 2001-2004 2005-2008 21

3 March 2009

Thank you

22

Value added by major economic sectors

Year-on-year rate of increase in value added in real terms 2004 2005 2006 2007 Services Wholesale and retail Import and export trades % 9.9

6.9

15.4

% 7.5

8.3

15.9

% 7.1

7.1

9.0

% 7.0

6.8

6.0

2008 H1 % 5.4

7.4

8.7

2008 Q3 % 1.9

2.6

4.9

Restaurants and hotels Transport and storage Communications Financing and insurance 23.0

13.7

14.6

21.0

6.8

6.9

9.4

11.9

9.4

6.6

7.7

19.7

11.0

5.1

5.3

17.6

4.2

6.1

4.4

7.4

2.0

1.4

4.5

-0.8

Real estate and business services Community, social and personal services 2.6

2.6

4.2

-0.1

1.9

1.3

6.4

1.7

5.6

1.1

-0.2

1.6

23

2009 Medium Range Forecast

($ billion) 2009-10 Operating revenue Operating expenditure Operating surplus ／ (deficit) Capital revenue Capital spending* Capital financing deficit Consolidated deficit Fiscal reserves - as number of months of government expenditure - as a percentage of GDP 234.2 244.0 (9.8) 27.5 57.6 (30.1) (39.9) 448.1 18 27.2% * Including the repayment of government bonds 2010-11 235.3 249.4 (14.1) 44.3 55.2 (10.9) (25.0) 423.1 17 24.6% 2011-12 2012-13 253.7 258.1 (4.4) 52.1 69.6 (17.5) (21.9) 401.2 15 22.3% 273.5 267.1 6.4 53.7 68.9 (15.2) (8.8) 392.4 14 20.9% 2013-14 290.0 276.4 13.6 56.3 71.2 (14.9) (1.3) 391.1

14 19.9% 24