1. 1 Update on the Hong Kong Economy for The Task Force on Economic Challenges Government Economist 22 January 2009

2. 2 Global developments since last meeting (1) Concern over financial market meltdown receded, but global downturn deepening, taking its toll on world trade Pressure now spread to wide range of businesses, due to downward spiral from credit crunch; asset market plunge and deteriorating sentiment from job losses Asia also hard hit; exports of many Asian economies showed double-digit declines in Nov Inflation receding fast, amid weak demand conditions

3. 3 Global developments since last meeting (2) Central banks pursuing aggressive monetary easing; benchmark interest rates approaching zero in some advanced economies Governments continue to roll out more stimulus packages; USs huge package still in the pipeline Financial institutions in the US and UK continued to report huge losses over the past weeks; UK government just announced its second rescue plan

4. 4 Local developments since last meeting Exports suffered across-the-board decline in Nov Retail sales and restaurant business show signs of relative improvement during latter half of Dec Housing market stabilised somewhat after drastic decline Interbank rates down to level before global crisis; credit conditions for some sectors eased somewhat, but credit situations in hard-hit sectors like I/E trade remain severe Unemployment rate risen further; job vacancies sharply lower 14 measures from Central Government on 19 December 2008 to support Hong Kong economy

5. 5 Global economic situation worsened more than expected…

6. 6...leading to a successive mark-down in forecasts Jan 2008Aug 2008Jan 2009 World2.82.6-0.2 United States2.71.4-1.8 Euro area2.01.1-1.4 Germany1.91.1-2.0 United Kingdom2.00.9-2.2 Japan2.01.2-1.7 China9.89.27.4 India8.47.75.6 Hong Kong5.34.7-1.3 Singapore6.05.0-2.4 South Korea5.04.40.6 Taiwan4.7 -1.1 Malaysia5.95.21.4 Thailand4.9 1.1 Average of private sector forecasts for 2009

7. 7 US mired in recession…

8. 8 Job losses posing a severe drag on US consumption

9. 9 Plunge in business sentiment; investment stalls

10. 10 US imports falling even faster, which impact severely on Asias exports

11. 11 US inventories have depleted significantly; but it will take some time for inventory rebuilding to resume

12. 12 Situation in EU and Japan likewise worrying …

13. 13 EUs business sentiment lowest in 15 years; imports cut back sharply amid recession mode

14. 14 Similar situation in Japan

15. 15 Exports in Asia all plunging in November

16. 16 Chinas external trade affected in a significant way...

17. 17 Export orders are markedly down

18. 18 Industrial value-added growth at record low* Excluding January and February, in which the year-on-year comparisons are distorted by the different timing of the Lunar New Year each year.

19. 19 Guangdongs processing exports and imports both plunging

20. 20 Mainlands retail sales still firm

21. 21 Impact of global financial turmoil on Hong Kong

22. 22 Financial services

23. 23 Financial sector activities sharply down in 2008 Q3

24. 24 …as stock market turnover dwindled

25. 25 …and loan growth down further

26. 26 Financial services sector: unemployment/vacancy* * Private sector vacancies posted by the Labour Department. Latest unemployment rates are provisional.

27. 27 Financial services sector: SME weekly survey on business receipt % decline as compared to normal situation for the week ending:- SMEs by sectors28 Nov5 Dec12 Dec19 Dec 26 Dec and 2 Jan 9 Jan Wholesale trade-24.7-16.0-16.4 -10.8-7.6 Retail trade-24.8-23.8-24.2-22.9-23.2-22.4 Import/export trades-17.8-19.4-18.3-16.9-18.9-19.3 Restaurants-13.9-14.7-13.9-13.1-12.1-13.1 Logistics-29.7-39.0-34.7-36.9-33.5-38.5 Travel agents-15.2-11.4-12.2-12.1-12.6-11.9 Financing institutions -23.3-24.1-24.5-23.2-20.7-18.9 Insurance agents and brokers -9.2-9.6-9.4-9.7-9.9-9.5 Real estate and construction -32.5-28.9-31.7-31.4-30.6-30.4 Business services-8.9-7.6-8.0-11.4-10.9-10.3 All the above sectors-18.5-19.3-18.4-17.3-18.5

28. 28 Trading and logistics

29. 29 Exports down 7% in November... 1998 AFC 2001 global downturn 2003 SARS Current global crisis

30. 30...drastic decline in cargo flows impacting severely on logistic sector

31. 31 Trading and logistics: unemployment/vacancy* * Private sector vacancies posted by the Labour Department. Latest unemployment rates are provisional.

32. 32 Trading and logistics: SME weekly survey on business receipt % decline as compared to normal situation for the week ending:- SMEs by sectors28 Nov5 Dec12 Dec19 Dec 26 Dec and 2 Jan 9 Jan Wholesale trade-24.7-16.0-16.4 -10.8-7.6 Retail trade-24.8-23.8-24.2-22.9-23.2-22.4 Import/export trades-17.8-19.4-18.3-16.9-18.9-19.3 Restaurants-13.9-14.7-13.9-13.1-12.1-13.1 Logistics-29.7-39.0-34.7-36.9-33.5-38.5 Travel agents-15.2-11.4-12.2-12.1-12.6-11.9 Financing institutions -23.3-24.1-24.5-23.2-20.7-18.9 Insurance agents and brokers -9.2-9.6-9.4-9.7-9.9-9.5 Real estate and construction -32.5-28.9-31.7-31.4-30.6-30.4 Business services-8.9-7.6-8.0-11.4-10.9-10.3 All the above sectors-18.5-19.3-18.4-17.3-18.5

33. 33 Tourism and consumption- related sector

34. 34 Retail sales still down in Nov; tourist arrivals showed some relative improvement in Dec * The December 2008 figure is a crude estimate.

35. 35 Tourism and consumption-related sector: unemployment/vacancy* * Private sector vacancies posted by the Labour Department. Latest unemployment rates are provisional.

36. 36 Tourism and consumption-related sector: SME weekly survey on business receipt % decline as compared to normal situation for the week ending:- SMEs by sectors28 Nov5 Dec12 Dec19 Dec 26 Dec and 2 Jan9 Jan Wholesale trade-24.7-16.0-16.4 -10.8-7.6 Retail trade-24.8-23.8-24.2-22.9-23.2-22.4 Import/export trades-17.8-19.4-18.3-16.9-18.9-19.3 Restaurants-13.9-14.7-13.9-13.1-12.1-13.1 Logistics-29.7-39.0-34.7-36.9-33.5-38.5 Travel agents-15.2-11.4-12.2-12.1-12.6-11.9 Financing institutions-23.3-24.1-24.5-23.2-20.7-18.9 Insurance agents and brokers -9.2-9.6-9.4-9.7-9.9-9.5 Real estate and construction -32.5-28.9-31.7-31.4-30.6-30.4 Business services-8.9-7.6-8.0-11.4-10.9-10.3 All the above sectors-18.5-19.3-18.4-17.3-18.5

37. 37 Real estate and construction sector

38. 38 Property market took a breather in December after drastic decline for 2 months

39. 39 New private construction projects have stalled… …but Governments increased construction to provide some offset Building and construction expenditure 2008 Q1 – Q3 Year-on-year % change % share of total Private-0.1%78% Public1.9%22% Total0.4%

40. 40 Real estate and construction sector: unemployment/vacancy* * Private sector vacancies posted by the Labour Department. Latest unemployment rates are provisional.

41. 41 Real estate and construction sector: SME weekly survey on business receipt % decline as compared to normal situation for the week ending:- SMEs by sectors28 Nov5 Dec12 Dec19 Dec 26 Dec and 2 Jan9 Jan Wholesale trade-24.7-16.0-16.4 -10.8-7.6 Retail trade-24.8-23.8-24.2-22.9-23.2-22.4 Import/export trades-17.8-19.4-18.3-16.9-18.9-19.3 Restaurants-13.9-14.7-13.9-13.1-12.1-13.1 Logistics-29.7-39.0-34.7-36.9-33.5-38.5 Travel agents-15.2-11.4-12.2-12.1-12.6-11.9 Financing institutions-23.3-24.1-24.5-23.2-20.7-18.9 Insurance agents and brokers -9.2-9.6-9.4-9.7-9.9-9.5 Real estate and construction -32.5-28.9-31.7-31.4-30.6-30.4 Business services-8.9-7.6-8.0-11.4-10.9-10.3 All the above sectors-18.5-19.3-18.4-17.3-18.5

42. 42 Total job losses by sector since Jun-Aug 2008

43. 43 Feedback from SMEs

44. 44 Impact on business receipts % decline as compared to normal situation for the week ending:- SMEs by sectors28 Nov5 Dec12 Dec19 Dec 26 Dec and 2 Jan 9 Jan Wholesale trade-24.7-16.0-16.4 -10.8-7.6 Retail trade-24.8-23.8-24.2-22.9-23.2-22.4 Import/export trades-17.8-19.4-18.3-16.9-18.9-19.3 Restaurants-13.9-14.7-13.9-13.1-12.1-13.1 Logistics-29.7-39.0-34.7-36.9-33.5-38.5 Travel agents-15.2-11.4-12.2-12.1-12.6-11.9 Financing institutions -23.3-24.1-24.5-23.2-20.7-18.9 Insurance agents and brokers -9.2-9.6-9.4-9.7-9.9-9.5 Real estate and construction -32.5-28.9-31.7-31.4-30.6-30.4 Business services-8.9-7.6-8.0-11.4-10.9-10.3 All the above sectors-18.5-19.3-18.4-17.3-18.5

45. 45 Impact on employment % change as compared to normal situation for the week ending:- SMEs by sectors28 Nov5 Dec12 Dec19 Dec 26 Dec and 2 Jan9 Jan Wholesale trade000000 Retail trade-0.6-0.4-0.8-0.4-0.6-0.9 Import/export trades-2.3-1.6-0.8 -0.9-1.1 Restaurants-2.8-3.1-3.3-2.8-3.4-2.9 Logistics-5.8-6.0-6.7 -4.1 Travel agents+0.5+0.600-0.40 Financing institutions-0.3 -1.3-0.7-0.9 Insurance agents and brokers 000000 Real estate and construction -7.3-6.2-7.6-8-8.1-8.4 Business services-4.5-2.7-3.1-3.2-3.1-3.0 All the above sectors-2.4-1.9-1.8-1.7 -1.8

46. 46 Impact on access to credit Tighter than normal for the week ending:- SMEs by sectors28 Nov5 Dec12 Dec19 Dec 26 Dec and 2 Jan 9 Jan (% of SMEs) Wholesale trade12.09.1 9.510.05.0 Retail trade10.08.510.18.58.88.0 Import/export trades17.1 15.817.0 15.6 Restaurants19.015.313.614.310.710.5 Logistics015.05.611.111.8 Travel agents3.33.6 3.73.83.7 Financing institutions12.5 13.210.8 Insurance agents and brokers 15.011.110.55.010.010.5 Real estate and construction 11.4 8.69.15.92.9 Business services5.7 6.1 0 All the above sectors12.5 11.612.111.910

47. 47 2009 outlook

48. 48 Further mark-down by private sector analysts on Hong Kongs GDP in 2009 S&P:0.7-1.2%Credit Suisse:-2.2% Bank of China:0.5%Hang Seng Bank:-3% Citigroup: 0.3%Goldman:-3% Standard Chartered:-0.9%Morgan Stanley:-3.8% Fitch:-1.2%Deutsche Bank-4% JP Morgan:-1.3% HSBC:-2%

49. 49 Our latest assessment With global recession now underway, worst is yet to come; timing of recovery depends on effectiveness of stimulus packages by major economies HK economy likely to experience negative growth for several quarters, leading to further job losses and rising unemployment Governments efforts to ease credit access and create employment to render some help during this difficult period; support from the Central Government a confidence booster Inflation will come down visibly, which should help enhance competitiveness Confidence is key; HK economy set to recover once the external environment improves

50. 50 End