The Hong Kong economy is rebounding very nicely in the second quarter. The quarter-to-quarter growth rate, seasonally adjusted, stood at 3.3 percent (13.9 percent annualized). This impressive rebound would have been even higher if it had not been for the H1N1 outbreak. Because of the sharp contraction in the first quarter, however, the second quarter still recorded a 3.8 percent contraction year-on-year.

The rebound of the Hong Kong economy should not be surprising at all. Just a while ago, Singapore reported that its annualized growth rate in the second quarter was a whopping 20.4 percent. China also reported a respectable rate of growth at 7.9 percent year-on-year and India reported that its June industrial production surged a surprising 7.8 percent, the best growth since February 2008 and more than twice as high as forecasters expected.

Early in the year, both the SAR government and the business sector were expecting the worst. Unemployment was surging, confidence was collapsing, and the economy shrank at 7.8 percent year-on-year, even worse than the worst showing during the Asian Financial Crisis. Now in Hong Kong the seasonally adjusted unemployment rate has stabilized at 5.3-5.4 percent since the February-to-April period through the May-to-July period.

The coordinated stimulation programs around the world, in particular quantitative easing by all the major economic powers, have worked. Instead of the free fall the world was expecting, there is life again in the economy.

We have reason to expect that the recovery will continue.

Even though American consumers are scaling back, there is little reason to worry. Indeed, it is right that American consumers increase their ultra-low savings rate. The US does not have to rely on an ultra-low savings rate to grow.

The US can increase its exports, and by increasing its exports benefiting employment at large. American consumption can pick up when more people are employed. For this reason, the world should not abhor a weaker US dollar, which indeed must be part of the picture if it is going to address its "global imbalance problem".

A weaker US dollar will also benefit Hong Kong. Hong Kong's economic growth in the second quarter was very much driven by exports, even though domestic consumption was also picking up nicely. Hong Kong's strong housing market is also helping revive consumer confidence and credit for small and medium enterprises.

In the US, inventory depletion has been going on for months, and this bodes well for future growth. The most recent Philadelphia Fed Business Outlook Survey's future indicators showed notable improvement in August. The future general activity index increased from 18.0 to 27.6. The indexes for future new orders and shipments also rose 15 and 11 points respectively. On balance, firms expect an increase in employment levels over the next six months. These firms are export-oriented, and the survey results are pointing at the right direction.

There are of course lingering worries about the commercial property market and the interest rate resets for Alt-A and ARMs. The road of recovery is going to be somewhat bumpy. But the signs are that the rest of the world, rather than the US, will lead the recovery. A weaker dollar boosting exports and more cautious consumers cleaning up their debt mess are part of the picture unfolding right now.

The author is professor and director of the Centre for Public Policy Studies of Lingnan University

(HK Edition 08/20/2009 page1)