The economy of the Hong Kong Special Administrative Region (SAR) showed a further contraction in the third quarter of 1998, contrasting sharply with the very good performance during the same period of 1997, the Director of the Hong Kong Economic and Trade Office of the SAR Government in Canada, Mr Donald Tong, said today (Friday).

However, Mr Tong pointed out that the territory's economic position should be looked at in relation to the performance of neighbouring economies which are all undergoing the economic adjustment process.

He said Hong Kong still has very solid economic fundamentals which will help it ride out the storm. There are some positive signs emerging lately in the local markets. Liquidity has apparently improved from the earlier tight situation.

Other factors indicating that Hong Kong's economy has stabilised include the easing of local interest rates and the rebounding of share prices and the number of tourists visiting Hong Kong.

"Prices of apartments have tended to stabilise. All these should help to reactivate sentiment, giving hopefully some beneficial effect on local demand," Mr Tong said.

He said a crude initial assessment by the SAR Government suggested that the Gross Domestic Product (GDP) could have fallen by around 7 per cent in real terms in the third quarter of 1998 over a year earlier.

The declines in the first and second quarters were 2.7 per cent and 5 per cent respectively.

He attributed the third-quarter decline to a number of factors, including a further fall in local consumer spending, rising unemployment, sharp volatility and price falls in the financial markets, and slow-down of construction activity.

Externally, exports of goods suffered a significant setback, due to the slackening in exports to the United States and the mainland of China, and even more so to the rest of East Asia. Also relevant was the disruption in air cargo handling services at the new airport in July and August.

He added that the base of comparison for GDP was high in the third quarter last year. This also magnified the year-on-year decline in the third quarter.

"The labour market continued to adjust to the economic downturn through lay-offs and wage cuts. The seasonally adjusted unemployment rate and the underemployment rate rose to 5 per cent and 2.7 per cent respectively in the third quarter of 1998 (5.3 per cent and 2.7 per cent respectively in the three months ending October)."

As for the outlook for the fourth quarter, external demand will continue to be curtailed by the economic slump in Japan and in many other East Asian economies. Also expected to dampen external demand is the moderation in imports in the United States and the mainland of China.

Mr Tong said that the GDP for 1998 as a whole is now forecast to contract by 5 per cent in real terms. Consumer price inflation for 1998 as a whole is now forecast to average at 3%.

"Our forecast is more or less in line with the forecasts of institutions like International Monetary Fund, the Pacific Economic Cooperation Council, the Organisation for Economic Cooperation and Development , the Asia-Pacific Economic Cooperation, and Hong Kong's reputable analysts which are mostly in the range of 4-5 per cent decline," Mr. Tong said.

"Both the private sector and public sector in Hong Kong will continue to work very hard to combat the difficulties arising from the economic adjustment process. Once the adjustment process is over and both the local sentiment and the external environment turn for the better, Hong Kong's economy will be able to return speedily to positive growth."

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