Hong Kong's economy grew at the fastest rate in over a year last month, underpinned by a sharp rise in output and new orders after the SARS outbreak, the latest Purchasing Managers' Index (PMI) survey showed.

The July PMI posted a reading of 51.4, up slightly from 50.2 in June and staying above the no-change 50-mark for the second straight month. A reading above 50 signals economic expansion.

"The recovery of business activity, following the end of the SARS epidemic and the control over the situation in Iraq, has been moving at a pace faster than expected," a statement said.

The survey, conducted by NTC Research and the Chartered Institute of Purchasing and Supply Hong Kong, polls 250 companies across different sectors representative of the economy.

"Hong Kong, having a small, open economy, would be one of the areas which should benefit from easier monetary conditions and an uptrend in global growth," said Pieter van der Schaft, regional fixed income strategist at Barclays Capital.

The July reading showed that the Hong Kong economy grew at its fastest rate since June 2002, with sharp increases in both output and new orders.

In the first 20 days of July, over 760,000 visitors arrived in Hong Kong, surpassing the level for the whole of June. But tourism officials say there is still a long way to go before arrivals return to pre-SARS levels.

The value of new mortgage loans approved rose sharply in June and anecdotal evidence suggests would-be homebuyers were also active in July.

But economists said the recent positive data belied more fundamental weaknesses in the Hong Kong economy.

Unemployment stood at a record 8.6 per cent for the three months to end-June, while consumer prices have fallen for nearly the last five years, with no immediate sign of an end to the downward spiral.

"The mortgage data shows a bit of a bounceback, but we don't think this is part of a sustained uptrend in the economy," said George Leung, chief economist for HSBC in Hong Kong.

The size of the labour market also rose for the first time in five months, although marginally.

The outbreak of severe acute respiratory syndrome (SARS), which peaked in Hong Kong in late March, dealt a heavy blow to the economy as it kept locals at home and scared away travellers.

The deadly disease was contained in June and the tourism and hotel sectors have shown signs of recovery as travellers slowly trickle back to the city.

Hotel occupancy rates had risen to about 60 per cent in the first two weeks of July from 30 per cent in June and 15 per cent in May, Hong Kong's acting finance chief said earlier this month.

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