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2005 and 2006 Real GDP Growth in the past 10 years % 15 Average U.S. Japan China Hong Kong 3.3% 1.0% 8.4% 3.1% 10 5 0 1995 1996 -5 1997 1998 1999 2000 2001 2002 2003 2004 Real GDP Growth Rate Forecasts % 2004 2005F 2006F U.S. 4.4 3.5 3.3 Japan 2.6 1.3 1.6 China 9.5 8.5 8.2 PEO Economies (weighted average) 5.4 4.2 4.2 East Asia 6.5 4.9 5.0 Other PEO economies 4.2 3.4 3.3 8.1 4.7 4.1 Hong Kong Real GDP Growth Forecasts % 10 2004 2005F 2006F 8 6 4 2 0 PEO Economies U.S. Japan China Hong Kong Strong Growth in 2004 • Strongest growth in real GDP in about 20 years for the global economy • A sharp rebound in East Asia from 2003, which was marked by the SARS outbreak in parts of the region • Strong growth in U.S. led by very strong domestic demand • China confirmed as a new growth engine for the region • Strong growth in China led by fixed asset investment and consumption • China overtook Japan as the 2nd most important trading partner for many Asia Pacific economies; and overtook the U.S. as Japan’s most important trading partner 2005 Slowdown • Slower but still robust growth • Further monetary tightening • The growth engines – China and the U.S. are both projected to slow down • Investment is projected to continue to decline in China • Higher energy and non-oil commodity prices • Slower growth in Southeast Asia 2006 Consolidation • Lower oil prices • Tightening monetary policy • Dollar value of the U.S. current-account deficit should start to fall as a share of GDP • Lagged effects of U.S. dollar depreciation should start to show up in higher levels of exports and lower growth of imports Hong Kong’s Real GDP Growth 15 10.2 y-o-y % change 10 8.1 5.1 3.4 5 0.5 1.9 3.1 4.7 4.1 0 -5 -5 -10 1997 1998 1999 2000 2001 2002 2003 2004 2005F 2006F Y-o-y growth rate (%) 2002 2003 2004 2005F 2006F 1.9 3.1 8.1 4.7 4.1 Private Consumption Expenditure -1.1 -1.1 6.9 4.6 3.5 Gross Investment -4.5 0.9 4.1 2.8 2.4 9.2 13.1 15.3 10.0 9.1 8.7 14.2 15.3 10.1 9.2 11.7 8.1 15.0 10.0 8.5 7.5 11.5 13.8 9.8 8.9 Import of Goods 7.9 13.1 14.1 10.0 9.0 Import of Services 3.7 -2.1 10.7 8.0 7.5 Gross Domestic Product Real Exports of Goods & Services Export of Goods Export of Services Real Imports of Goods & Services Date of Forecast: March 21, 2005. Private Consumption Expenditure (volume) Y-o-y % change 15 10 PCE 2004 2005F 2006F 6.9% 4.6% 10.9 3.5% 5.7 5 3.9 0.3 5.3 5.9 4.6 0.1 0 -1.0 -2.3 -5 -1.3 -3.5 -4.8 -10 02Q1 03Q1 04Q1 05Q1 Gross Domestic Fixed Capital Formation (volume) 15 Y-o-y % change 10 Investment 2004 2005F 2006F 4.1% 2.8% 2.4% 5.0 5 11.5 5.1 2.7 2.2 0.8 2.2 0 -0.3 -1.0 -5 -1.4 -4.4 -4.7 -10 -15 -12.2 02Q1 03Q1 04Q1 05Q1 Merchandise Trade HK$ bn Exports Imports 5 2004 15.3% 13.8% 2005F 10.0% 9.8% 2006F 9.1% 8.9% HK$ bn 250 0 200 -5 150 -10 100 -15 50 Balance Imports Exports -20 Jan-02 0 Jan-03 Jan-04 Jan-05 Visitor Arrivals Mainland (non-IVS) Other Countries Mainland (under IVS) % of Mainland Visitors 100 2,000 80 1,500 60 1,000 40 500 20 0 Jan-02 0 Jan-03 Jan-04 Jan-05 % of VA from Mainland China . Person ('000) 2,500 Record-breaking performance to be expected Total Visitor Arrivals (mn) Total Tourism Expenditure (HK$ bn) 2004 21.8 91.8 2005F 23.41 97.8 2006F 27.14 114.7 • Hong Kong Disneyland will open in September 2005 • Other new infrastructure projects include Hong Kong Wetland Park and Tung Chung Cable Car • An additional funding of HK$470 million will be used by HKTB to implement the 2006 Discover Hong Kong Year Campaign Source: Hong Kong Tourism Board Composite CPI (y-o-y % change) % 10 5 2004 2005F 2006F Inflation -0.4% 1.5% 2.0% 0 -5 -10 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Unemployment Rate (Seasonally Adjusted) 9 Rate (%) 8 7 6 5 Jan-02 Jan-03 Jan-04 End month of 3-month average Jan-05 Hang Seng Index versus Nasdaq 15,000 2,500 12,000 2,000 9,000 1,500 6,000 1,000 3,000 500 Jan-02 Jan-03 Hang Seng Index Jan-04 Jan-05 Nasdaq Property Price Indices 1999=100 150 125 100 75 50 25 Jan-02 Domestic Premises Jan-03 Offices Jan-04 Retail Premises Jan-05 Flatted Factories Residential Mortgages Loans in Negative Equity No. ('000) HK$ bn 120 180 Number Value 100 150 80 120 60 90 40 60 20 30 0 0 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar 2002 2003 2004 2005 Risk: Depreciation of US dollar USD Trade Weighted Index – Broad Jan 97 = 100 140 130 120 110 100 Jan-02 Jan-03 Jan-04 Jan-05 • A further widening imbalance in trade and financial flows (current-account deficit in U.S. vs. current-account surpluses in many East Asian economies) • U.S. current-account deficit expected to reach a record US$775 billion or 6.1% of GDP by year end • PEO forecasts a fall in the trade-weighted US dollar of 6.1% in 2005 and 5.6% in 2006 • A sudden loss of confidence in the US dollar could precipitate a disorderly decline in the value of the US currency • The current-account surplus in China will rise from 2.4% in 2004 to 3.1% in 2005 and 3.3% in 2006, fuelling calls for early revaluation of the yuan and fanning protectionist sentiment in industrialized countries Risk: Interest Rate Increases HIBOR versus LIBOR bp % pa 300 4 150 2 0 0 -150 -2 -300 Jan-02 -4 Jan-03 Spread of 3-month HIBOR over LIBOR Jan-04 3-month HIBOR Jan-05 3-month LIBOR