LI, Tao @ Hong Kong

Stalls sit at the Victoria Park New Year flower market on the eve of Chinese New Year in February. GDP growth forecast for the full year has been revised to 5 to 6 percent in 2011, up 1 percentage point from the 4 to 5 percent estimated earlier. Jerome Favre / Bloomberg

GDP growth and inflation accelerate; Exports and food prices surge

The Hong Kong government has raised its forecast for both economic growth and inflation this year after the economy expanded 7.2 percent in the first quarter, the fastest pace in a year, and March inflation rose to 4.6 percent, the highest since August 2008.

Gross domestic product (GDP) growth forecast for the full year has been revised to 5 to 6 percent in 2011, up 1 percentage point from the 4 to 5 percent estimated earlier.

The 7.2-percent business expansion in the first quarter was more than any of the estimates in a survey of 17 economists by Bloomberg News, which was also higher than the 7.0 percent average growth for 2010 as a whole.

Government economist Helen Chan said the stronger-than-expected GDP growth in the first quarter was bolstered by larger-than-estimated exports and strong domestic demand.

“The mainland’s strong economy has also spurred production and export activities in the region,” Chan told reporters Friday.

Total exports surged by 16.8 percent in the first quarter of 2011 from a year earlier, and the city’s unemployment rate fell to a post-crisis low of 3.4 percent during the three months.

Donna Kwok, Greater China economist with HSBC said the size of the surprise quarterly figure underlined that the dynamo economy ran on a triple, not dual, engine.

“Mainland demand for ‘made in Hong Kong’ goods and services, easy money conditions and local shoppers boosted by forever improving job market conditions all fit in the picture,” said Kwok, adding that this would inevitably turn up the heat on inflation.

The government also raised its full-year forecast for underlying consumer price index (CPI) – the main gauge of inflation to 5.5 percent in 2011 from the 4.5 percent announced earlier, after the inflation rate climbed 3.7 percent in the quarter.

The pick-up in consumer prices was driven by rising commodity and food prices as well as higher housing rents, said the government, adding that the latter two factors accounted for more than 70 percent of the inflation rate in the quarter.

Tightening measures initiated by the government to cool the property price last year appeared to have had little effect as home prices rose by another 9 percent in the first quarter.

By March 2011, apartment prices in Hong Kong had surpassed the historic peak in 1997 by around 3 percent, fueling concerns of the potential risk of a property bubble.

“Inflationary pressures are coming from all fronts,” said Irina Fan, senior economist at Hang Seng Bank.

Such pressures “won’t be eased soon,” and with buoyant economic growth and booming job market, inflation will remain at high levels, perhaps going beyond 6 percent in some months this year, Fan told China Daily.

Imputing import inflation to the dollar peg, as well as rising rentals and labor cost, Kevin Lai, a senior economist at Daiwa Institute Research, said prices could “accelerate in the coming months and could cross over the 5 percent mark as soon as this month.”

The government is helpless in fighting inflation, he asserted. “The government can do nothing without the tools of foreign exchange rate and interest rate due to the dollar peg,” said Lai.

However, Matt Robinson, senior economist from Moody’s Analytics, said outlook for the city remained favorable as it enjoyed the benefits of close ties with the mainland, and the some 5 percent year-on-year growth in coming quarters would be impressive for a developed economy already well into a self-sustaining expansion.

“Emerging inflation poses some threat to the outlook, but the government’s apparent willingness to introduce measures to temper consumer and asset price pressures suggest the expansion will be sustained,” Robinson said.

China Daily

(HK Edition 05/14/2011 page2)

http://www.chinadaily.com.cn/hkedition/2011-05/14/content_12509679.htm