The unemployment rate rose to a record 8.7 per cent in the three months ending July 31 in the Hong Kong Special Administrative Region, as new graduates flooded an already tight labour market in the lingering aftermath of the SARS crisis, the government said Monday.

Some 309,000 people were out of work during the three-month period, the Census and Statistics Department said. It said the unemployment rate "would remain high as a result of the continued entry of fresh graduates and school leavers into the labour market."

But officials predict a post-SARS (severe acute respiratory syndrome) recovery in tourism will improve Hong Kong's economy and the labour market.

"I am cautiously optimistic we are now coming out of the unemployment peak," said Financial Secretary Henry Tang. "The increase has moderated... our economy is beginning to show some signs of recovery."

Unemployment reached a previous record of 8.6 per cent for the three months ending on June 30 as an outbreak of SARS battered an already flagging economy, bankrupting many businesses and putting thousands out of work.

Officials said the increases in unemployment were mainly in trading, hotels and recreational sectors while construction, restaurants and business services recorded decreases in jobless numbers.

The rise in the unemployment rate had been widely expected.

But "we're expecting the unemployment rate peaked in July as things are looking much better in August,'' said Francis Lun, general manager of Hong Kong's Fulbright Securities.

"Business in the retail sector has returned to pre-SARS level. Some companies are even doing better than the time before SARS,'' Lun said.

SARS, which killed 299 people here and more than 800 worldwide, devastated Hong Kong's tourism industry. The World Health Organization imposed a travel warning on Hong Kong between April 2 and May 23.

A tourism rebound has fueled confidence that the economy and the labour market are poised to recover, said Ben Kwong, director of stock brokerage KGI Asia.

Officials said the rebound has been particularly noticeable in inbound tourism and related sectors such as airlines, the retail trade and business services.

Around 1.3 million people visited the city in July, a 78 per cent rise from June, although still down 5 per cent from the same period last year. Among the July visitors, those from the Chinese mainland was more than double that in May, while the hotel occupancy rate reached 60 per cent in July compared with around 20 per cent in May during the SARS crisis.

Hong Kong is looking to tourism to provide work for recent graduates and others.

The government has taken steps to bolster the tourism sector, including signing a free-trade pact with the Chinese mainland and loosening visa regulations. Meanwhile, officials also expect a gradual return of long-haul international travelers.

In good times, the tourist trade employs 71,000 people and generates 6 per cent of Hong Kong's economic growth. Another 295,000 people work in tourism-related sectors, such as restaurants.

But some Hong Kong people voiced pessimism about economic prospects.

"Many of my friends are still looking for jobs," said a 30-year-old finance manager Sharon Wong. "The recovery in our sector is slow and it'll take a long time before things will really look good."

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