28. Given the bleak economic prospects in Europe and the US, the risk of a sharp deterioration of the external environment is increasing. Despite their relatively strong economic fundamentals, Asian and emerging market economies have seen a noticeable slowdown in their growth momentum recently. As a result, our external demand has been faltering. I am not optimistic about Hong Kong’s export performance in the first half of this year, and if exports of goods were to plunge in the first quarter, the overall economy might take a downturn in that quarter.
29. Fortunately, many Asian economies have started to ease their monetary policies, and there is also much policy room for the Mainland to bolster economic growth. So long as the European debt crisis does not escalate into a full blown crisis, the Asian region should be able to serve as an anchor for the global economy. Hong Kong’s external trade may also see some improvement in the second half of this year.
30. I shall introduce measures worth nearly $80 billion in this year’s Budget to better prepare our people for the difficult time ahead. Besides supporting enterprises and people in meeting challenges, these measures will help ease the burden of inflation on people. This is a strong package of measures and would help stimulate the economy 1.5 percentage points in 2012. The measures, coupled with other positive factors including our strong economic fundamentals, the robust performance of the tourism industry and a wealth of infrastructure projects being rolled out, will help tide us over a difficult and thorny year. Even so, economic growth will inevitably be lower than the average growth rate over the past decade. I forecast GDP growth of one to three per cent in real terms for 2012.
31. The range between the upper and lower boundaries of this forecast is larger than the usual one percentage point. This reflects the unusually large degree of uncertainties in the external environment this year, especially when the European debt crisis is still twisting and turning. It is difficult to predict with any certainty the possibility of a severe recession in Europe and, if so, the precise ramifications on Asia.
32. As regards inflation, with global food and commodity prices retreating from peaks and local costs easing off as a result of economic slowdown, I believe the inflation rate would ease quite visibly in the second half of 2012. The average underlying inflation rate for the year is expected to drop from 5.3 per cent in 2011 to four per cent this year. The headline inflation rate for 2012 is estimated at 3.5 per cent after taking account of the effects of the one-off measures I am about to propose.
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