Impacts of the Financial Tsunami on the Hong Kong Economy Government Economist 3 November 2008

1. Impacts of the Financial Tsunami on the Hong Kong Economy Government Economist 3 November 2008

2. Economy already slowing before global financial crisis

3. Global financial crisis adding significant downside risks to HK economy • Global financial crisis mutated into synchronised downturn • Financial markets under exceptional stress credit conditions unusually tight • Key risk facing advanced economies is downward spiral between asset prices and real economy, leading to prolonged slump • Increasing impact on Asia in coming quarters

4. Transmission mechanisms – how it impacts on HK • Trade • Asset markets • Credit market tightness impacting on SMEs • Consumption and investment • Unemployment, with feedback on domestic sector

5. Impact on trade

6. Exports slackening fast as global downturn increasingly set in

7. Hong Kong’s total exports of goods by market(year-on-year rate of change in real terms) Note : (*) Crude estimates.

8. World GDP growth in current and previous downturns Note: (#) IMF’s Forecast in the World Economic Outlook.

9. Current US$ strength will not bode well for HK’s exports

10. Guangdong’s export growth slower than the national total

11. Impact on asset markets and domestic demand

12. Stock market saw a significant correction

13. Property market also down across the board

14. Property market transactions down to level close to 2003 average

15. Asset price corrections in the current and previous downturns

16. Negative wealth effect can be profound

17. Slowdown in income will also impact on consumption

18. Impact on Businesses

19. Bankruptcy cases still low,but likely to rise

20. Business confidence worsened markedly(Results of latest Quarterly Business Tendency Survey)

21. Results of latest Business Tendency Survey(Large firms)

22. Impact on SMEs also severeFigures on SMEs:

23. Business investment set to slow

24. Impact on labour market

25. Employment conditions to worsen as economy slows

26. Unemployment expected to rise further

27. Employment impacts in previous downturns

28. Sectors expected to be harder hit(1) • Financial services • Trading and logistics • Tourism and consumption-related • Real estate and construction

29. Sectors expected to be harder hit(2) (*) 2006 position.

30. Wide range of uncertainties ahead

31. HK’s economic slowdown will be more severe if: • Global financial market meltdown • Global downturn degenerated into prolonged and severe slump; and Asia moving into recession • US$ continues to strengthen • China's exports slow markedly • Property market suffers continued fall-off

32. Factors that may cushion HK against a severe slowdown : • Global concerted efforts to prevent systemic crisis from spreading further • Global financial markets stabilise • CPG’s support for Hong Kong: Premier Wen’s recent remarks • China maintains reasonably strong momentum, especially in trade • Interest rates hold stable or move down • US$ to reverse trend • Infrastructure projects can speed up

33. Short-term economic outlook • GDP growth likely to slow down further in Q4; earlier forecast of 4-5% for 2008 difficult to attain • Economic conditions will worsen further in early 2009; prospect of turnaround in H2 2009 still highly uncertain • Unemployment rate looks set to rise further, more visibly in 2009 • Inflation likely to ease as pressures from local and external sources recede significantly

34. Overall • Global financial crisis will inflict major shocks on HK economy via various channels • HK's strong fundamentals mean speedy recovery once global situation turns for better • But short term outlook inevitably much dimmer; risk of recession in 2009 now higher • Remain alert to risk of potentially more damaging impact from global crisis • Need to get prepared for difficult period ahead

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