Economic Prospects
11. Last year, our nominal GDP surpassed its 1997 peak to reach a new high of $1,382.2 billion. Hong Kong has now fully emerged from the Asian financial crisis and has regained its strength and vitality. Our domestic economy has been moving forward with increased momentum, and we are better placed to ward off external shocks. I am cautiously optimistic about this year's economic outlook.
12. The external environment should remain generally positive this year. Following the macroeconomic adjustment the Mainland economy underwent, it continues to grow strongly on a firmer footing. Despite the threat of protectionism from other countries and overinvestment in certain sectors, the Mainland economy nevertheless put in a strong performance, with consumption and investment booming. Production has been gradually upgraded, and people's income keeps rising. Mainland provinces and cities are constantly improving their infrastructure, and market reform is deepening.
13. The largest economy in the world, the US, has in recent years demonstrated its internal resilience and shrugged off a number of unfavourable factors. It has maintained steady growth. The situation in the US does, however, cast shadows over the state of the global economy. These include its huge current account deficit, whether there will be a larger-than-expected adjustment in US property prices following their sharp increases in recent years, and whether consumption in the US is sustainable in the long term by increasing debt. European economies have been clouded for several years by negative sentiment but have shown recent signs of improvement. The Japanese economy has gradually regained its vitality after emerging from a prolonged downturn. Most other Asian economies will benefit from the strong performance of economies such as those of the US and Japan, and show steady growth.
14. However, the full impact on the global economic climate of increased oil prices and successive interest rate hikes has yet to be felt. Higher interest rates may also crimp the growth in local private consumption and investment expenditure. In addition, heightened geo-political tensions in certain parts of the world may also lead to further volatility in oil prices and financial markets.
15. Taking all these factors into account, and subject to there being no serious incidents or major external shocks, Hong Kong's economy is expected to achieve solid growth in 2006, with GDP forecast to increase by 4 to 5 per cent, slightly higher than the trend growth rate over the past ten years. As our economy continues to grow, the employment situation should improve further. Inflation will remain moderate, with the Composite Consumer Price Index (CCPI) expected to rise by 2.3 per cent for the year as a whole.
16. In the medium term from 2007?010, I forecast a 4 per cent trend GDP growth rate in real terms, and a 2 per cent trend rate of increase in the GDP deflator. The forecast trend growth rate of nominal GDP over the period from 2007 to 2010 is therefore 6 per cent.
