Economic Prospects for 2018 and Medium-term Outlook

38.    Looking ahead, I am cautiously optimistic.  The global economy remains on an upward trend, with a synchronised upturn in major economies.  The International Monetary Fund lately forecast that the global economic growth this year should reach 3.9 per cent, the fastest since 2011.  Yet, we need to remain alert to changes in the global monetary environment and geopolitical situations, as well as policy risks of major economies.

39.    The performance of the US economy last year exceeded expectation, with unemployment rate falling below the levels before the financial tsunami.  As the US implemented a tax reform at the end of last year, we need to continue monitoring its potential impact on the US and global economy, as well as the capital flows worldwide.  The pace of monetary policy normalisation of the Federal Reserve is another major factor affecting the global economic and monetary environment this year.

40.    The recovery momentum in the Eurozone becomes more entrenched as the unemployment rate continues to fall.  The policy moves by the European Central Bank following its tapering of monthly asset purchases early this year and the progress of Brexit negotiations deserve attention.

41.    In the Mainland, as it deepens the supply-side structural reform to promote economic upgrading and transformation, and continues to prevent and control financial risks, it is expected to maintain a medium-high rate of economic growth and remain the main engine of global economic growth this year.

42.    All in all, the prevailing external environment is promising.  The expected gradual pick-up in demand from major economies will lead to considerable growth in Asian exports.  Hong Kong's exports of goods should be able to grow steadily.  If the recovery of tourism in recent months can be sustained, Hong Kong's retail sector will also see a more vibrant performance.

43.    Our favourable employment and income conditions will spur consumption growth in Hong Kong this year.  Sanguine local economic sentiment and positive business confidence should also sustain investment growth.  In the light of the global and local economic situations at this juncture, I forecast economic growth of three to four per cent for Hong Kong this year.

44.    On inflation, local cost pressures will go up somewhat amid sustained economic growth.  Imported inflation will also edge up alongside the global economic upturn, but such pressure is unlikely to be high.  Overall, inflation will remain moderate this year.  For 2018 as a whole, I forecast that the headline inflation rate will be 2.2 per cent with an underlying inflation rate at 2.5 per cent.

45.    Since the start of this year, the expectation of a US interest rates adjustment has triggered substantial fluctuations in the global financial markets.  I urge all investors to stay vigilant.  As always, the Government is committed to ensuring an orderly and steady operation of our financial system.

46.    Over the past few years, with a tight supply of residential flats, ultra-low interest rates and an influx of capital, property prices have soared beyond the affordability of ordinary citizens.  However, I believe that the key factors underpinning soaring property prices over the past few years are gradually undergoing fundamental changes.  First, the supply of residential flats will increase.  The private sector will, on average, produce about 20 800 residential units annually in the coming five years (from 2018 to 2022), an increase of 50 per cent over the annual average in the past five years.  Besides, as at end-December 2017, the projected supply from the first-hand private residential property market in the next three to four years will remain at a high level of approximately 97 000 units.  We anticipate that the tight supply situation in the property market will ease.  Besides, as the US interest rate normalisation process continues, the ultra-low interest rate environment of the past few years will no longer persist.  The changes in these key factors will put pressure on the property market.  The Government will keep a close watch over changes in the property market.  Before making a home purchase decision, the public should carefully assess the risks involved, especially the impact of interest rate hikes on their ability to repay.