The Hong Kong government predicted Friday its gross domestic product (GDP) would contract by 6.5% this year as the government announced that its GDP fell 7.8% in the first quarter of 2009.

This marked the largest decline since the third quarter of 1998 when the economy was severely battered by the Asian Financial Crisis.

The Census and Statistics Department of Hong Kong said the marked deterioration in first-quarter performance was due to an unprecedented fall-off in world trade as global recession plunged into the most severe recession since World War II.

It is obviously worse than expected. It tells you how a severe global financial crisis can affect a healthy, small and open economy,” said Dong Tao, chief economist at Credit Suisse.

According to the Census and Statistics Department, the total exports of goods dropped 22.7% in the first quarter of 2009, comparing with the previous year. It is the biggest drop since 1954.

Exports of services declined by 8.2% and the private consumption expenditure fell by 5.5%; the overall investment remained much in a sluggish state, down by 12.6% in the first quarter over a year earlier.

The unemployment rate rose to 5.2% in the first quarter. As both local and external price pressures receded, the consumer price inflation continued to slide down. The inflation rate eased to 3.1% in the first quarter, from 5.4% in the fourth quarter of 2008.

The International Monetary Fund (IMF) once predicted that the world's GDP would contract by 1.3% in 2009, representing the most severe recession during the post-war period.

IMF believed that a slow recovery would only begin to take hold in 2010. With this background, the external environment will remain difficult and challenging in the rest of 2009.

Hong Kong's financial secretary, John Tsang, said the government would respond to the downturn by unveiling a new package of stimulus measures in the coming month.