1Hong Kong SAR GovernmentHong Kong SAR Government

2008 2008 HalfHalf--yearly Economic Report 2008yearly Economic Report 2008

&&2008 2008

Updated economic forecasts for 2008Updated economic forecasts for 2008

15 15 August 2008August 2008

22008Economic performance in 2008 Q2

3-6

-4

-2

0

2

4

6

8

10

12

14

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

10-year trend growth

(1998-2007)

4.2%3.8%

(%)Year-on-year rate of change in real terms (%)

Economy grew moderately in 2008 Q2

42008Salient features of Q2 performance

Economy grew moderately, as the adversities in the external environment put a drag on the growth of the Asian region

Exports of goods and services as well as consumption spending expanded at a slower pace; business confidence stayed positive

Labour market conditions held firm

Inflation went up further

50

1

2

3

4

5

6

7

0

2

4

6

8

10

12

14

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Japan EU US Mainland( RHS)

(%)Year-on-year rate of change in real terms (%)

Global economic growth slowing down

6-10

-5

0

5

10

15

20

25

30

35

40

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Exports of services

Exports of goods

7.1%4.4%

(%)Year-on-year rate of change in real terms (%)

Exports of goods and services facing a challenging external environment

7-10

-5

0

5

10

15

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Private consumption expenditure

2.3%

(%)Year-on-year rate of change in real terms (%)

Consumer demand moderated in growth

3.1%

10-year trend growth

(1998-2007)

8-20

-10

0

10

20

30

40

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

(%)Year-on-year rate of change in real terms (%)

Machinery, equipment and

computer software

Gross domestic fixed capital formation

Building and construction

Total investment spending expanded further

6.5%

-1.7%

4.3%

90

2

4

6

8

10

12

Q11998

Q11999

Q12000

Q12001

Q12002

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

(%)Unemployment rate (%)

Lower-skilled workers

Professional andmanagerial staff

Unemployment rate remained at the lowest in the past decade

Overall

3.8%3.3%

1.3%

10

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Payroll per person engaged

Earnings on the rise

3.1%

5.7%

(%)Year-on-year rate of change (%)

Composite consumerprice index (CCPI)

11

-4

-3

-2

-1

0

1

2

3

4

5

6

7

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Payroll per person engaged

Earnings on the rise

4.1%3.8%

(%)Four-quarter moving average, year-on-year rate of change (%)

Composite ConsumerPrice Index (CCPI)

12

Inflation went up

20082007

CCPI Inflation by component:

4.6(4.9)

1.31.34.6-3.51.67.23.95.4

17.4

Q1

5.7(5.7)

1.22.55.3-2.31.67.75.96.3

19.2

Q2

Q4

Q3

3.5(3.5)

1.6(2.7) Overall

1.01.3 Other services0.7-0.1 Transport3.42.1Misc. goods-4.0-4.2 Durable goods2.03.7 Clothing and footwear3.4-2.7 Electricity, gas & water4.20.7 Housing3.72.6Meals away from home11.68.2 Foodstuffs

Note: Figures in brackets represent inflation rates after discounting the effects of public housing rental waiver and rates concession.

13

Recent pick-up in inflation mainly due to

global food inflation

3.05.417.439.22008 Q1

1.92.68.216.1Q3

2.11.32.510.52006

2.41.84.413.32007 Q1

2.22.04.16.9Q2

3.76.319.244.8Q2

2.33.711.624.3Q4

Excluding

food

Meals away from home

Food-stuffs

Underlying CCPI

World food prices*

Note: (*) IMF data. : (*)

( Year-on-year rate of increase)

14

Consumer price inflation in Asia

7.5%7.5%Singapore

5.5%4.8%Korea6.1%5.7%Hong Kong

11.4%9.7%Philippines26.8%24.5%Vietnam

11.0%10.1%Indonesia8.9%7.5%Thailand7.7%7.8%India7.7%4.9%Malaysia

7.1%7.8%Mainland

5.0%4.2%Taiwan Jun Q2

2008

15

Outlook for the rest of the year

16

()Global economic growth, particularly in the advanced economies, to moderate further

Financial market turmoil to linger on

Mainland China and other emerging market economies, while being increasingly affected by the global environment, should expand solidly further

2008Outlook for economic growth in 2008

17

Firm labour market conditions, low interest rates and positive business confidence still support further growth in domestic demand

Economic growth likely to be moderate in the rest of 2008, more in line with the trend growth in the past decade

2008 ()Outlook for economic growth in 2008 (Contd)

18

Inflationary pressures around the world still rising

Food and oil prices have recently tended to ease in the international markets and US dollar to rebound. These are favourable developments for inflation, but commodity prices and exchange rate movements can still be volatile in the period ahead

2008Outlook for inflation in 2008

19

The lagged effects of earlier surges in local rentals being increasingly felt

Productivity improvements and the slower pace of economic expansion should help to lower pressures on prices and costs

The relief measures to be implemented in the second half of 2008 will help to lower notably the headline inflation

2008 ()Outlook for inflation in 2008 (Contd)

20

-8

-6

-4

-2

0

2

4

6

8

10

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

GDP

10-year trend growth

(1998-2007)

()(Forecast)

4-5%

(%)Rate of change in real terms (%)

2008Economy poised for a moderate growth in the rest of 2008

3.8%

21

-6

-4

-2

0

2

4

6

8

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Composite CPI

()(Forecast)

5.5%

4.2%

(%)Rate of change (%)

Underlying

Headline

20085.5%Underlying inflation at 5.5% in 2008

22

Latest forecasts for 2008

: 4-5%Forecast GDP growth : 4-5%

: 5.5%Forecast underlying CCPI inflation : 5.5%

: 4.2%Forecast headline CCPI inflation : 4.2%

23

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