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HK finance chief: Fed uncertainty clouds outlook

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KELVIN CHAN | February 26, 2014 04:28 AM EST | AP

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HONG KONG (AP) — Hong Kong's economic growth will pick up this year but remain under its long-term average, the Asian business center's finance chief predicted on Wednesday, warning that the global outlook is uncertain as the U.S. scales back monetary stimulus.

In his annual budget speech, Financial Secretary John Tsang forecast that Hong Kong's economy would grow 3-4 percent in 2014, boosted by additional government spending aimed at reducing income inequality. That's up from 2.9 percent in 2013 but lower than the 4.5 percent average over the past decade.

Mainland China helped underpin Hong Kong's growth last year as a tepid recovery in the major export markets of U.S and Europe dragged down its trade, Tsang said. Exports from the semiautonomous southern Chinese city to the U.S. shrank 4 per cent and shipments to the European Union fell 1 per cent.

Tsang warned of volatile financial markets and capital flows as the Federal Reserve trims its monetary stimulus.

"The U.S. economy may see some improvement in 2014," Tsang said. "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."

Because the world's biggest economy is showing signs of recovery, the Fed is reducing bond purchases that at their height totaled $85 billion a month. Economists are divided about when exactly the so-called "tapering" will end and when the Fed will start raising interest rates.

"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," Tsang said.

Tsang said the recovery in countries using the euro currency remains sluggish. In Japan, "it remains to be seen" whether the world's third-largest economy will continue to grow under a stimulus program launched last year, he said.

"The geopolitical uncertainties in many parts of the world are still a cause for concern in the coming year," he said.

Hong Kong, a former British colony, has thrived because of open markets and a busy port but those factors also leave it highly vulnerable to the fluctuations of global trade.

In a bid to address concerns about growing inequality in a city known for its freewheeling capitalism, Tsang unveiled 20 billion Hong Kong dollars ($2.6 billion) in one-off relief measures including tax cuts, rental assistance and welfare benefits. He said the extra spending would boost economic growth by 0.7 percentage point.