Hong Kong economy will grow 2.8 percent this year and 4 percent next year in real term, according to the latest issue of the Hang Seng Economic Monthly.

Hong Kong economy faces challenges in sustaining the growth momentum amid their respective structural imbalances -- with job creation appearing to top their agendas, the report said.

The major challenge for Hong Kong in attaining a sustained recovery is to capitalize on the opportunities opened up by the Mainland/Hong Kong Closer Economic Partnership Arrangement (CEPA) to induce investment and create employment, it said.

The Hong Kong economy is expected to be underpinned by buoyant external demand and a mild improvement in domestic demand in 2004. Total merchandise trade is projected to increase by 10.9 percent in real terms, slightly slower than the estimated growth of 13.1 percent in 2003, according to the report.

However, investment is unlikely to rebound strongly, curbed by persistent deflation which is forecast at 0.8 percent as measured by the Composite CPI in 2004, compared with an estimated 2.6 percent in 2003, the report said.

Domestic demand would be affected by structural factors such as high unemployment, stagnant income and rising taxes. Nonetheless, private consumption is forecast to grow mildly by 1 percent on stabilizing asset markets, it stated.

Although the unemployment rate fell from a peak of 8.7 percent in July 2003 to 8 percent in October 2003, the drop was largely contributed by a contraction of the labor force instead of job growth, it said. The inability of the economy to create new employment partly reflects the failure of the robust external sector to generate investment and new jobs.

Eventual success in reviving the economy depends on job creation which in turn relies on how effectively investment can be induced to the territory. This can be achieved through reinforcing Hong Kong's middleman role and reaffirming its position as a platform to enter the mainland market, the report said.

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