Nov. 2, 2010 -
PRLog -- Despite recently upping our 2010 real GDP growth forecast owing to signs of healthy expansion in Q210, we continue to believe that a downturn is on the near-term horizon as China's trade figures begin to cool. Indeed, our growth forecast for 2011 of just 1.5% reflects our view that Hong Kong is poorly placed to withstand a second global slowdown. On the political front, the passage of the government-
backed legislative reform package on June 23, following a compromise deal between the chief executive and pro-democracy politicians, should make the legislature marginally more democratic, but does little to change Hong Kong's solid short- and long-term political risk ratings. The compromised reform proposal hammered out between the chief executive and pro-democracy politicians was passed by 46 of the 60 lawmakers (well clear of the two-thirds required) on June 23, which should make the legislature marginally more democratic. The televised political debate between Chief Executive Donald Tsang and opposition Civic Party leader Audrey Eu on June 17 left Tsang severely defeated according to local polls and unable to convince the audience the merits of the existing political reform package for elections in 2012. Following the defeat, Beijing-appointed Tsang left the door open for making changes to the government's reform package, which was a surprising move and a departure from the government's usual hard-line stance that is ultimately controlled by Beijing. While there is some evidence to suggest the Hong Kong economic recovery has begun to fade, Q210 real GDP figures are likely to be strong and we are shifting back our forecast of for a secondary slump in activity. That said, with the purchasing managers' index rolling over, we still expect H210 to show a marked slowdown in real GDP growth relative to H110 and do not rule out an outright return to recession in 2011. Accordingly, we have bumped up our forecast for full-year real GDP growth in 2010 from 2.4% to 5.4%, while lowering our 2011 forecast from 3.0% to 1.5% and our 2012 forecast from 3.6% to 3.0%. Given the economic weakness in the eurozone and signs of a slowdown in the US , we expect Chinese exports and imports to peak in the near term. Given Hong Kong's heavy reliance on the re-export industry for economic growth, a fall in trade volumes could serve as a massive blow to the Hong Kong economy. In our business environment ratings, Hong Kong retains its position in the upper echelons of the Asian and global rankings. The score of 78.6 ranks eighth out of 167 countries worldwide and second in the region behind only Singapore. The 'market orientation' category is Hong Kong's strong point, with a high level of economic openness and limited government intervention making for a world-beating score of 85.2. We see few risks to these favourable characteristics of the local business environment over the coming years as the government remains highly committed to these principles.
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