Hong Kong's market economy flaunts efficiency.

As the graph above demonstrates, private consumption in Hong Kong is growing strongly, even at a time when GDP has begun a widely expected decline. Many financial observers attribute the decline to a slowdown in the economy of the United States (US), Hong Kong's biggest trading partner.

And in spite of strong domestic demand, inflation remains "benign," according to a December 7, 2006 review of the Hong Kong economy by the Economic Analysis Division of Hong Kong's Financial Secretary's Office.

Hong Kong's inflation "notched up by 2.0% in the first ten months of 2006" said the report. This follows an increase in the rate of inflation of 1.0 percent in 2005. This is especially encouraging since Hong Kong's economy grew 8.6 percent in 2004 and 7.3 percent in 2005, according to figures supplied by the International Monetary Fund (IMF). The IMF expects Hong Kong 2006 GDP to be 6.0 percent at the end of the year.

And the IMF says GDP will decline to 5.5 percent in 2007. This is strong growth and the unusually low rate of inflation deserves an explanation-especially because there has been "[an] extensive job creation process brought about by economic expansion."

This would normally create rather substantial inflationary pressures, but this has obviously not materialized. The Financial Secretary's report says that "An impressive total of some 311,000 additional jobs have been created since the trough in mid-2003, bringing total employment to successive record highs over the past year and thus leading to significant improvements in employment conditions in all segments of the labour market."

The Hong Kong economy has avoided considerable inflationary pressure for three reasons. First, business labor costs are less because Hong Kong's workforce has made productivity gains. Second, rental costs for business premises have moderated. And third, fuel prices have declined.

The rate of unemployment declined to a 64 month low of 4.5 percent for the three months ending in October 2006. In mid-2003 unemployment was 8.6 percent. The IMF expects unemployment to decline still further in 2007 to 4.0 percent.

But still the mystery of the graph on page one remains. As powerful as these three reasons may be, they don't seem to account for the significant pressure of increasing private consumption.

The Financial Secretary's report is straightforward about what private consumption means to the economy. "[The] domestic sector has been playing an increasingly important role in driving economic growth." The main drivers of domestic demand were listed as "upbeat" consumer sentiment, which in turn is positively affected by Hong Kong's solidly improving employment situation.

Part of the reason may lie with the structure of the Hong Kong economy. The economy is overwhelmingly dominated by the service sector, particularly financial and insurance. These services are at the forefront of productivity gains via technology-gains that can be more quickly made than in other economic sectors.

In short, the Hong Kong economy is remarkably efficient, able not only to compete aggressively in the world market, but to distribute goods and services internally with unusually smooth running market mechanisms.

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