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Budget Speech

Economic Outlook for 2014

13.    The US economy may see some improvement in 2014.  Nevertheless, there is still uncertainty over the Federal Reserve Board's exit strategy and interest rate policy.  Possible market fluctuations and the risk of reversal of capital flows will cast shadows over global economic growth this year.

14.    The Eurozone has pulled out of recession.  However, the root problems have yet to be solved, the financial markets are feeble, and unemployment rates are high.  Fundamentals are still weak and, as a result, the economic recovery will remain sluggish.

15.    Japan's government debt has reached as high as two and a half times the country's GDP.  The economy, while being troubled by the threat of deflation, lacked momentum over the past two decades.  It remains to be seen whether the economy will be able to maintain its growth trend propped up by the Japanese government's quantitative easing programme last year.

16.    The fiscal issues faced by these advanced economies have features in common, namely imbalanced fiscal structures, high debts and high unemployment rates.  The governments of these economies adopted expansionary policies to boost economic growth and employment, but the need to mend public finances and reduce fiscal deficits give rise to contractionary pressures.  Such contradictory policies would intensify social conflicts and unrest and make the road to economic recovery even more bumpy.  Hong Kong must learn from their lessons.

17.    Ultra-low interest rates and abundant liquidity under the loose global monetary environment have exposed emerging markets to risks of all kinds, including bursting of asset-price bubbles, greater volatilities of stock prices and exchange rates and intensified inflation pressure.  This will dampen their economic growth and performance.

18.    The geopolitical uncertainties in many parts of the world are still a cause for concern in the coming year.  It is difficult to predict what will happen.

19.    The faster economic growth in the Mainland provides crucial support to the regional economy.  In Hong Kong, local consumption prospects remain positive, inbound visitor numbers continue to grow and major infrastructure works are steaming ahead, all fuelling domestic demand; the weak external environment is also expected to show some improvement.

20.    I forecast GDP growth of three to four per cent in 2014, lower than the average annual growth rate of 4.5 per cent over the past decade.  As for unemployment rate, barring any external shocks, the labour market is expected to remain in a state of full employment.

21.    On inflation, global economic growth and inflation are likely to stay modest, and global food prices should hold steady by and large.  Domestically, the uptrend of factor costs is tapering off.  This, coupled with the markedly slower rise in rentals for fresh-letting of flats and shops last year, will help ease inflation pressure this year.  I forecast that the headline inflation for 2014 will average 4.6 per cent and underlying inflation at 3.7 per cent.

22.    Low interest rates and abundant liquidity have seen the local property market out of line with economic fundamentals, with heightened risk of a bubble.  Before the supply-demand situation of the property market regains its balance, Government must continue with its demand-side management measures.  These serve to forestall an increased risk of a property bubble that would hamper our macro-economic and financial stability.  Keeping the external environment and market conditions in view, I shall adjust these exceptional measures where and when appropriate.



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