Burdened by the effects of the credit crunch, Hong Kong is underperforming with its annual gross domestic product (GDP) forecast to grow by 4.2 percent - lower than the normal trend of 4.5 to 5 percent.

"Below this norm means Hong Kong is underperforming with resources not being put into good use," said Alan Siu, deputy director of the HK Institute of Economics and Business Strategy at the University of Hong Kong.

Local businesses have already experienced the negative impact from the credit crunch in terms of lending money for business operations or expansions.

"The credit crunch hurts businesses in the territory because of a lack in confidence," Siu added. "It's hard for companies to borrow money to pay their staff. Companies could pay back their loans in three to nine months before, but they have to roll over on a daily basis now. There is no quick fix for this."

Asked what could be a way out for Hong Kong, Siu said: "The government has to set a direction for Hong Kong as to what we have to do to benefit from the strong economic growth of the mainland".

Siu expects the mainland government to introduce policies to boost its domestic expenditure, and the knowledge and experience in human resources is what Hong Kong can offer, as Siu sees the mainland's service industry growing.

With local companies struggling to stay in business amid the financial turmoil, job cuts are on an upward trend.

"The employment rate is expected to go up to 3.8 percent in the current quarter, from the estimated 3.3 percent in the last quarter, due to uncertainties in the global financial markets, weakening external demand, volatile energy prices and a significant drop in asset prices, which are all dampening consumer confidence," Siu said.

According to the APEC Study Center of HKU's frequency macroeconomic forecast, real GDP growth in the third quarter this year is estimated to be 3.2 percent, year-on-year.

"Private consumption spending grew by 3.1 percent in the second quarter, down sharply from the 7.9 percent growth in the first quarter. The slowdown is due to the deceleration in real income growth. Confidence is hurt by falling asset prices. Private consumption expenditures are estimated to grow 2.7 and 2.4 percent in the third and fourth quarters, respectively," HKU's statement said.

(HK Edition 10/09/2008 page2)