HONG KONG - HONG Kong Financial Secretary John Tsang said on Monday there was a strong possibility the city's economy will show an improvement in the second quarter due to rising demand at home and abroad.

'As exports and domestic demand are improving, I expect that the year-on-year shrinkage of the economy in the second quarter will be smaller than the first quarter,' Mr Tsang told legislators.

'Chances are also fairly high that the economy in the second quarter will grow from the first quarter.'

Mr Tsang said unemployment had stabilised in May, after declining over an eight-month period, due to a series of government relief measures.

But he warned there were still some uncertainties ahead as the economies in the key export markets of the United States and Europe had yet to turn around.

Hong Kong's economy contracted 4.3 per cent in the first quarter of this year from the fourth quarter of 2008.

And it shrank 7.8 per cent year on year in the first quarter, the largest drop since the Asian financial crisis in 1998, the government said.

The city fell into recession in the third quarter of 2008 and in May the government slashed its growth forecast for this year to a contraction of 5.5-6.5 per cent. It had previously forecast 2.0-3.0 per cent shrinkage. -- AFP