Hong Kong's GDP is expected to increase by 4.5 to 5.5 percent in 2007, higher than the average growth rate for the past 10 years, Hong Kong Financial Secretary Henry Tang said in his presentation of the 2007-2008 Budget to the Legislative Council in Hong Kong Wednesday morning.

Nevertheless, there remain a number of uncertainties in the external economic environment, such as the increase in global financial market risks, whether the United States property market can achieve a soft landing and the slowdown in the U.S. economy, Tang said, adding that there may be greater volatility in the financial markets this year.

"Overall, however, I am cautiously optimistic about the economic outlook for 2007," he said.

As the economy gathers further strength, the employment situation should continue to improve, he said.

He is also optimistic about HK's economic outlook in the medium term. Hong Kong will continue to move up the value chain in services provision, and further consolidate its role as the financial, trade and logistics center for the region. The economic integration with the Mainland will also achieve appreciable synergies.

He forecast a 4.5 percent of annual trend growth rate and a 1.5 percent trend rate of increase in the GDP deflator from 2008 to 2011. This means that the forecast trend growth rate of nominal GDP from 2008 to 2011 will be 6 percent a year, said Tang.

The continuous upgrading of productivity has seen Hong Kong's economy achieving strong growth whilst keeping the inflation rate at a relatively low level of 2 percent during 2006. The underlying trend is for a further mild increase in 2007, with the inflation rate forecast to average 3.5 percent over the following four years, Tang said.

Yet because of the reduction in public housing rentals, the implementation of the Pre-Primary Education Voucher Scheme and the measures proposed in this Budget, the inflation rate for 2007 is expected to come down to 1.5 percent.

Moderate inflation is generally regarded by economists as a healthy sign in an economy, and should not be a cause for concern, Tang said, adding that the government will nevertheless keep a close watch on the inflation trend.