HK growth to slow next year, says bank

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DENNIS ENG The Manila-based bank says Hong Kong is expected to be one of the economies in the region hardest hit by any slowdown in the US.

Three weeks ago, the Hong Kong government revised its gross domestic product forecast for this year to 6.5 per cent from between 4 and 5 per cent after reporting better-than-expected economic growth of 6.8 per cent in the third quarter. Inflation was expected to be 2 per cent this year.

The bank said regional rival Singapore's growth was also expected to moderate from 7.8 per cent this year to 5.3 per cent next year, while the mainland was projected to see slower growth of 9.5 per cent next year, down from 10.4 per cent this year.

Economic growth in East Asia, including Japan, is forecast to dip to 4.4 per cent next year from 4.9 per cent.

On balance, in 2007 East Asia faces an external economic environment that is expected to be somewhat less supportive of exports and growth but more conducive to containing inflationary pressures, said Masahiro Kawai, who heads the bank's office of regional economic integration.

Mr Kawai also pointed out that the effectiveness of mainland measures to rein in investment in sectors such as real estate remained to be seen and could pose further risks to Hong Kong.

He said the mainland should concentrate on improving the quality of investments rather than the volume.

The bank report said Hong Kong relied heavily on the booming mainland economy to support its growth, although a sharp downturn in the US would have a negative impact on local exports to the mainland that were destined for the US.

The risk of a possible recession hitting the US economy was higher now than earlier this year, Mr Kawai said.

With many East Asian economies having significant exposure to the US, Mr Kawai said there was a need to reduce dependence on exports and generate more domestic demand. He noted that exchange-rate flexibility could also foster domestic consumption.

The ballooning US current account deficit rose from US$$213.2 billion in the first quarter of the year to US$$218.4 billion in the second. It also saw Asian currencies, especially the Korean won and the yuan, appreciate in value against the US dollar.

Moves to contain the deficit could include influencing exchange rates to make exports cheaper, Mr Kawai said. In the long term, Hong Kong, which has long maintained a currency peg to the US dollar, could consider other exchange-rate options.