Hong Kong's economy grew by just over 6 percent in 2007 but will slow this year, although the government said it remains "cautiously optimistic" on the outlook, despite an uncertain global economic environment.

"Economic growth last year was just above 6 percent, around 6.1 or 6.2 percent, less than 6.5 percent," a spokesman for Financial Secretary John Tsang told Reuters on Monday.

"We are cautiously optimistic, but we don't expect the growth rate to be as high this year as in the past few years," he said by telephone.

A 6.1 to 6.2 percent expansion in gross domestic product (GDP) last year means the economy grew by around 6.4 percent in the fourth quarter from a year earlier, close to the 6.2 percent rate of growth in the third quarter, economists said.

They said private consumption expenditure was the main driver of fourth-quarter growth, as interest rates were falling and wages continued to rise, and was likely to remain so this year.

Economists interviewed by Reuters expect economic expansion to slow to between 5 and 5.5 percent in 2008 because export growth is set to ease.

However, their forecasts are based on the view that a potential US recession would be short.

"Recent turmoil in financial markets clearly shows higher risk of a downturn in the US affecting the global economy. Hong Kong's two main sectors - trade and finance - will get hit," said Joe Lo, senior economist at Citigroup.

He lowered his 2008 economic growth forecast for the territory this month to 5.3 percent from 6.2 percent.

Fiscal stimulus

Hong Kong's economic growth has surged in the past four years, averaging 7 percent annually.

It is helped by mainland's economy, which is creating demand for services in the territory, and is expected to grow by 10 percent this year.

Locally, falling interest rates and a tight labor market should continue to spur consumer spending, economists say.

Hong Kong tracks US interest rate cycles because of its currency peg to the US dollar. Banks have cut rates five times since September and are expected to cut them again this week if the US reduces rates, as markets expect.

Exports, however, are likely to slow in coming months.

Economists say consumption could falter if a sharp slowdown in the trade sector results in job losses and have urged Tsang in his annual budget on February 27 to step up fiscal stimulus.

The government is expected to post a record budget surplus for fiscal 2007/08 of at least HK$80 -HK$100 billion as a strong economy has boosted tax revenues and land sales for the city.

Tsang has pledged to announce one-off tax concessions and relief measures in the budget.

He will also cut standard salaries and profits tax rates by 1 percentage point to 15 and 16.5 percent, respectively, and allocate $32 billion for infrastructure projects.

Lo at Citigroup said he hoped Tsang would also cut marginal tax rates, increase tax allowances and give a bigger one-off tax rebate than last year when it gave a waiver on half of income tax subject to a ceiling of HK$15,000 per person.

"Cutting the standard tax rate will not benefit most taxpayers. They need to cut marginal tax rates and raise allowances as well," Lo said.

The government is due to announce details of fourth-quarter and full-year 2007 GDP on February 27, coinciding with the budget when it will also announce a forecast for economic growth in 2008.

Reuters

(HK Edition 01/29/2008 page2)