HONG KONG -- Hong Kong's economy is expected to increase by 4 to 5 percent in 2008, a pace lower than that in the past four years due to the global economic slowdown, Hong Kong Special Administrative Region (HKSAR) government Financial Secretary John Tsang said here Wednesday morning.

Presenting his first Budget to the Legislative Council, Tsang said the forecast economic growth in 2008 would be "solid" and higher than the average trend growth rate for the past 10 years, were there not any unexpected serious incidents or major external shocks.

Tsang called the Hong Kong economic prospect in 2008 as "cautiously optimistic" as the slowdown in growth of Europe and the United States will have some impact on the economies of emerging markets and the Chinese mainland.

Tsang believed the Chinese mainland's sustained rapid economic growth and its increasingly intensified economic integration with Hong Kong will greatly promote Hong Kong's economy and help cushion the impact of the global slowdown.

"The economic fundamentals in Asia remain strong, which will help to improve our external trade performance and consolidate our position as Asia's world city," Tsang said, adding: "local interest rate cuts, following those in the United States, will also stimulate economic growth."

On the medium term economic outlook, Tsang said he estimated that the annual average growth rate will be 4.5 percent in real terms for the period 2009 to 2012.

However, Tsang said, the underlying inflation rate in 2008 is estimated to rise to 4.5 percent, while the inflation rate forecast will average 4 percent in the next four years as a result of continued economic expansion and high global commodity prices.

"Upon implementation of the various one-off measures proposed in this Budget, the inflation rate will fall to 3.4 percent in 2008," Tsang said. "The global trend of rising inflation deserves our attention."

Taking all external factors like the US sub-prime mortgage problem and the Chinese mainland's overheating worries into consideration, Tsang said, Hong Kong is now faced with the risk of global economic slowdown coupled with rising inflation.

"We should be aware of the possibility that the situation might deteriorate in the near future and that the fallout may be prolonged," he said.