HONG KONG: The government will lower its 2009 economic expectations after getting slapped with a weak first quarter that bodes little reason for optimism in the second quarter, Chief Executive Donald Tsang said yesterday.

The government's current forecast anticipates a contraction of about 3 percent in the city's economy this year.

"I believe GDP (gross domestic product) figures for the first quarter, due for release tomorrow, will demonstrate ... a noticeable slide in our economy," Tsang told legislators. "The second quarter is not optimistic. The global economy has not stabilized."

The government promised further measures to support the economy in the next few weeks.

Tsang said the economy had deteriorated during the first quarter. Compared to the fourth quarter of last year there had been a 22 percent drop in first-quarter exports and a 5.5 percent decline in retail sales.

Trade and finance, two of the city's economic mainstays, have been hit hard by the global economic downturn.

Hong Kong's economy tipped into recession in the third quarter of last year and economists say it is unlikely to recover until the US economy picks up.

Hong Kong's recession-hit economy probably shrank 5.2 percent in the first quarter, according to a poll among experts taken by Reuters and reported Wednesday.

That would make the quarter just ended the worst since early 1999 and the Asian financial crisis shrunk exports and rising unemployment hit consumer demand.

On a quarterly basis, the GDP likely declined for a fourth straight quarter, marking the longest contraction since 2001 and the bursting of the dot-com bubble. A fourth straight decline would track trends among regional neighbors Japan, Singapore and New Zealand.

Economists did not give precise forecasts for the quarterly change in gross domestic product.

The Reuters report, however, said the GDP probably fell between 1.5 and 1.8 percent from the previous three months, slightly lagging a 2 percent seasonally adjusted decrease in the fourth quarter.

That may suggest the economy is bottoming out, although economists said it is too soon to confirm that the worst is over.

"The risk is very much on the downside," said Eric Tsang, an analyst at Calyon. "The US and other major markets have been showing slight signs of economic deceleration, but we can't say conclusively that the global economy has reached bottom."

The GDP data, to be released today, will not fully reflect the downturn in the trade sector.

Net exports probably rose slightly in the first quarter largely because imports fell by an even greater amount.

However, imports, like exports, are predominantly re-exports with mainland and trade volumes in the first quarter slumping more than 20 percent year on year.

The government and economists forecast GDP will shrink 3 percent this year, its first full-year contraction since 1998.

Unemployment has shot up to 5.2 percent from 3.2 percent last summer, further depressing consumer spending and confidence.

The government has announced some measures to support the economy, including easier access to credit for businesses and more temporary tax cuts and waivers on utility bills. It has also brought forward infrastructure projects to create jobs.

The government is expected to announce further stimulus measures in the next few months. Kevin Lai, senior economist at Daiwa Institute of Research, says additional measures are urgently needed.

"The government is clearly not acting enough to help counteract this recession," said Lai. "It should step up temporary tax cuts, increase welfare payments and introduce consumption coupons like Taiwan has done. At least then you push people to go to the shops, that's key."

The government can afford to spend more after announcing a surprise fiscal surplus for 2008/09, bucking forecasts for a hefty deficit.

China Daily - Agencies

(HK Edition 05/15/2009 page6)