Economic Outlook for 2017

11.    Looking ahead, in 2017, the economic growth of advanced economies will be modest and patchy.  This, coupled with new uncertainties brought about by political changes in many parts of the world and rising populist and protectionist sentiments, will further complicate the situation and render the global economic outlook volatile.

12.    The US economy has continued to improve in the recent period but the economic policy agenda of the new administration has remained unclear.  Despite the fact that the US may introduce fiscal stimulus measures conducive to global economic growth, there is increasing market concern over whether the US will roll out, in phases, a number of trade protection measures, which may disrupt the improving growth momentum in global trade.  The Federal Reserve Board (Fed) will proceed with or even expedite the normalisation of US interest rates.  Consequently, monetary policy divergence among major central banks will become more pronounced.  All these will impact on the global economy and financial environment.

13.    Economic growth in Europe is still constrained by its structural debts.  This, together with the Brexit developments and the upcoming general elections in some major European countries this year, will complicate and add uncertainties to the political and economic outlook for Europe.  This may weigh on the European economy as well as global monetary and financial stability.

14.    The growth of the Mainland economy is increasingly driven by domestic demand and the service sector, and is moving towards a pattern of sustainable development.  With stable and appreciable economic growth as well as ample policy room, the Mainland economy should be able to maintain a medium-high pace of growth, remaining a mainstay supporting global economic growth.

15.    Japan's economy has been stuck in low gear, facing high deflation risks.  A package of fiscal stimulus and monetary initiatives has been launched but the effectiveness is yet to be seen.

16.    As regards emerging markets, international energy and metal prices have rebounded from the low level over the recent past, easing the downward pressure on commodity-exporting economies.  Emerging markets in Asia will remain the main propellers of global economic growth.

17.    The slightly improved global economy over the recent period will lend support to Hong Kong's export performance.  If the recent growth momentum continues, our merchandise exports will see a stronger performance this year.  However, the aforesaid risk factors in the external environment will cast shadows over the export trade in Asia and in Hong Kong.  Under these circumstances, sustaining domestic demand will remain crucial to maintaining the stable development of our economy and underpinning the employment market.  Moreover, inbound tourism has improved recently, with fresh growth in the number of visitors.  If this continues, the retail sector should be set to stabilise further.

18.    Locally, favourable conditions in the job market and rising labour earnings have bolstered consumer confidence in the recent past.  Sustained increases in infrastructure and other building and construction activities should provide momentum for domestic demand.  In the light of the recent developments and granting no severe external shocks, I forecast Gross Domestic Product (GDP) growth of two to three per cent in 2017.

19.    But, the uncertain external environment and interest rate trend may trigger abrupt shifts in capital flows and heighten volatility in local asset prices, with repercussions on consumption and investment sentiments and on macro-economic stability.  Over the past few years, the tight supply of residential flats, ultra-low interest rates and an influx of capital have made the local property market even more exuberant, resulting in high flat prices which are out of tune with the local economy.

20.    The current-term Government is committed to increasing land and housing supply, and has introduced several rounds of demand-side management measures and macro-prudential policies.  These efforts have effectively maintained the overall macro-economic and financial stability.  The introduction of the Special Stamp Duty and Buyer's Stamp Duty, together with the earlier increase in Ad Valorem Stamp Duty, has achieved significant results in combating short-term speculation, curbing external demand and reducing investment demand.  Moreover, with the Government's strenuous efforts in increasing land supply in the past few years and the gradual completion of housing units, we expect that the supply of residential flats will increase substantially in the next few years.  However, the property market may have to face potential risks if the Fed normalises interest rates faster this year.  We will closely monitor the situation.

21.    The still-low global inflation and strong US dollar have lessened the impact of the rise in international oil prices, maintaining imported inflation at a low level.  Inflationary pressure will remain mild in the short term.  I forecast that the headline inflation rate for 2017 as a whole will be 1.8 per cent with an underlying inflation rate at two per cent.